Pre-Annual General Meeting Information • Jul 24, 2015
Pre-Annual General Meeting Information
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THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you should seek professional advice from an appropriately qualified independent financial adviser.
If you have sold or otherwise transferred all of your Ordinary Shares, you should forward this document and the accompanying Form of Proxy to the purchaser, transferee or agent through whom the sale or transfer was effected.
A Notice of General Meeting of the Company, to be held at 12.00 p.m. at Durrants Hotel, 26-32 George Street, London W1H 5BJ on 12 August 2015, is set out at the end of this Circular. Whether or not you intend to be present at the General Meeting, you are asked to complete and return the enclosed Form of Proxy in accordance with the instructions printed on it as soon as possible and, in any event, so as to be received by the Registrar by not later than 12.00 p.m. on 10 August 2015. Completion and return of a Form of Proxy will not preclude you from attending and voting in person at the General Meeting, should you so wish.
(Incorporated and registered in England with limited liability with registered number 05746555)
and
This document includes statements that are, or may be deemed to be, ''forward looking statements''. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ''expects'', ''intends'', ''may'', ''will'', ''seeks'', or ''should'' or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include statements regarding the Company's and the Directors' intentions, beliefs or current expectations. By their nature, forward looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance. The Company's actual performance, achievements and financial condition may differ materially from those expressed or implied by the forward-looking statements in this document. Any forward-looking statements that the Company makes in this document speak only as of the date of such statement, and neither the Company nor any of the Directors undertakes any obligation to update such statements unless required to do so by applicable law or regulation.
This Circular is dated 24 July 2015
| Page | |
|---|---|
| Expected Timetable | 2 |
| Letter from the Chairman of LMS Capital plc Part 1 |
3 |
| Part 2 Proposed investment objective and investment policy |
11 |
| Part 3 Possible risks associated with the change to investment policy and investment trust status |
with 13 |
| Part 4 Carried interest plan |
14 |
| Part 5 Proposed directors' remuneration policy |
16 |
| Definitions | 21 |
| Notice of General Meeting | 23 |
| Latest time and date for receipt of Forms of Proxy | 12.00 p.m. 10 August 2015 |
|---|---|
| General Meeting | 12.00 p.m. 12 August 2015 |
| Effective date of change of investment policy | By the end of September 2015 |
All references in this document are to London time unless otherwise stated.
(Incorporated in England and Wales with registered number 05746555)
Directors: Registered Office: Martin Knight (Chairman) Bernard Duroc-Danner Nick Friedlos Neil Lerner Robert Rayne Antony Sweet
LMS Capital plc 100 George Street London W1U 8NU
24 July 2015
Dear Shareholder,
The Company today announced a proposal to change its investment policy from its current realisation strategy to enable it instead to make investments in the global energy sector. An investment team comprising Robert Rayne, Tom Daniel, Bernard Duroc-Danner and Tony Hayward will oversee this new strategy. Julian Metherell will act as a senior adviser to the investment team.
The change to investment policy and certain related ancillary matters require Shareholder approval.
This Circular explains why the Board considers the proposals set out in this Circular to be in the best interests of Shareholders and why the Board is unanimously recommending that Shareholders vote in favour of the Resolutions.
The Company has received irrevocable undertakings to vote in favour of the Resolutions from members of the Rayne family and associated trusts in respect of 34.06% of the Ordinary Shares (of which 2.97% comprises the beneficial holding of Robert Rayne).
On 30 November 2011, Shareholders approved an orderly realisation of assets with the aim of achieving a balance between an efficient return of cash to shareholders and maximising the value of the Company's investments. At that time the Company had a market capitalisation of £155 million and net assets of £240 million.
The Company has returned £115 million to Shareholders since the start of the realisation strategy. As at 30 June 2015 (being the latest practicable date prior to the date of this Circular), the Company had net assets of £136.1 million.
The Board includes members with more than three decades of experience of investing in the energy sector and the Company has a track record of making investments in this sector. The collapse of oil and gas prices over the past year has caused severe dislocations in the energy sector, which has put the industry under great pressure and created a potentially compelling investment opportunity.
At the same time, the Board is mindful, that, as the portfolio reduces in size, the management time and costs involved in running the portfolio, together with the requirement to maintain sufficient working capital, could increasingly impact returns to Shareholders.
The Board is therefore proposing that the Company adopts a strategy of active investment in the energy sector, and believes that the Company's experience in this sector combined with that of the new investment team will provide the opportunity to create long term value for Shareholders.
The Board believes that the change in the Company's investment policy will:
* allow the remaining net assets of the Company to continue to be realised in accordance with an optimum timeline of return;
* reduce the winding-up costs of the existing Company structure; and
If Shareholders do not approve the change in investment policy, the realisation strategy approved by Shareholders in November 2011 will continue.
If the proposed investment policy is approved by Shareholders, the Company's investment objective would be to generate total returns above market averages through income and long-term capital growth by making investments in the global energy sector and related industries, with a particular focus on resource-based and supply chain and services investment opportunities.
The Company would continue its realisation programme in respect of its existing portfolio in accordance with the time line and strategy under the existing investment policy. The disposal proceeds (net of an amount required for working capital purposes) would then be invested in accordance with the proposed investment policy.
In selecting investments in the global energy sector and related industries, the investment team is proposing to target investments that are expected to generate long-term capital growth, with the aim of maintaining a diversified and flexible portfolio.
Investments would be focused on three core portfolio areas: private equity; public equities; and special situations, including credit opportunities. The intention is that investments in public equities or special situations would be restricted to no more than 50% of gross assets (excluding public securities acquired in the context of an intended acquisition of control or take private transaction).
In addition, no single investment would (at the time of investment) represent more than 25 per cent. of gross assets.
The Company may invest in public or private securities; investments may be made in the form of, among other things, equity, equity-related instruments, derivatives and indebtedness. The Company may hold controlling or non-controlling positions and may invest directly or indirectly.
The Company may incur indebtedness for investment purposes and may use hedging techniques to manage, among other things, currency risk exposure.
Assuming that there are no capital constraints over the course of the investment cycle, the Company would aim to make between 10 and 20 investments, comprising small to medium-sized transactions with an average investment size of £20 million to £40 million per investment, with the aim of providing diversification in the portfolio and generating value for Shareholders.
The Company requires approval from both the FCA and Shareholders for any material change to its investment policy. The Company received FCA approval on 8 July 2015. The proposed resolution to change the investment policy is set out in the Notice of General Meeting at the end of this document. The approval is conditional on: (i) FCA approval of the appointment of an alternative investment fund manager for the Company; and (ii) FCA approval for a sufficient number of the individual members of the investment team, such number being as agreed between the Company and the Company's portfolio manager.
Further details on the change to investment policy, including the text of the proposed investment policy, are set out in Part 2 of this Circular.
In addition to the change to investment policy, the Company intends to apply to HMRC for approval as an investment trust. The advantage of obtaining investment trust status is that, for each accounting period for which the Company continues to be approved by HMRC as an investment trust, the Company will be exempt from UK taxation on its capital gains. The Company is intending to qualify as an investment trust in respect of its accounting period which commenced on 1 January 2015 and its accounting periods commencing thereafter. In order to obtain approval as an investment trust, the Company must meet certain conditions which it currently expects to meet. A failure to meet those conditions could lead to the Company's being unable to qualify for the exemption from tax on its capital gains that is afforded to those with investment trust status.
Material possible risks associated with the change to investment policy and with investment trust status are set out in Part 3 of this Circular.
The Company will initially use its existing cash balances and the proceeds generated from the realisation of its existing portfolio (net of an amount required for working capital purposes) to make new investments in accordance with the proposed investment policy, such investments to be the ''Energy Assets''. The Company has committed to make available for the purposes of the Energy Assets cash proceeds from the realisation of the Legacy Assets of a minimum of £100 million. A proportion of this amount (comprising net cash and certain other assets) will be available for investment from the effective date of the change of investment policy.
Longer term, it is intended that at least £150 million in equity capital will be raised within 24 months of adoption of the new investment policy. If this capital is not raised in this timeframe, the Board will review the options available to the Company. FCA and Shareholder approval will be sought if the Board decides to change the investment policy of the Company at that time.
A schedule setting out the existing LMS Capital portfolio is set out in Part 2 of this Circular.
The Company intends to realise the assets in this portfolio in accordance with the management strategy it has deployed throughout the period of the realisation strategy. The Board believes that continuation of this approach in relation to the current investment portfolio is in the interests of Shareholders.
Responsibility for this realisation will remain with the existing LMS Capital management team (as described further below).
Following the adoption of the proposed investment policy, the Company will be an alternative investment fund for the purposes of the AIFM Directive.
In order to comply with the requirements of the AIFM Directive, as implemented in the UK, the Company is proposing to appoint Frostrow Capital LLP, an independent FCA regulated investment firm, as its external alternative investment fund manager. This appointment is subject to FCA approval, which the Company and Frostrow Capital LLP expect to be forthcoming by the end of September 2015. The Company will also be required to appoint a depositary. The AIFM appointment and therefore implementation of the proposed investment policy will not come into effect until the depositary is appointed.
In addition, it is intended that arrangements compliant with the requirements of the AIFM Directive, as implemented in the UK, will be put in place so as to provide that, following the proposed investment policy becoming effective, Frostrow Capital LLP will delegate the portfolio management of the Company's assets (both the assets held by the Company as at the date of the change of investment policy (the ''Legacy Assets'') and the Energy Assets) to St James's Asset Management, an investment management firm established by Tom Daniel, in which it is intended that Robert Rayne, Tony Hayward and Bernard Duroc-Danner will become partners.
St James's Asset Management is regulated by the FCA and is authorised to provide investment management and advisory services. Since its authorisation in November 2012, St James's Asset Management's activities have included advising clients on investment management and corporate finance issues. Following appointment as the portfolio manager of the Company's assets, St James's Asset Management will not take on any additional energy mandates without the consent of the Company.
The new investment team, comprising Robert Rayne, Tom Daniel, Bernard Duroc-Danner and Tony Hayward, will manage the Energy Assets. Julian Metherell will act as senior adviser to the investment team. Nick Friedlos, Antony Sweet and Robert Rayne will manage the Legacy Assets, with Nick Friedlos and Antony Sweet doing so through secondment arrangements between the Company and St James's Asset Management. Applications will be made to the FCA as appropriate in respect of the relevant approvals to be obtained for all of the individuals concerned.
Under the AIFM Agreement, Frostrow Capital LLP will be appointed by the Company to provide risk management, portfolio management, company secretarial administration and other services to the Company and to be the Company's AIFM. The AIFM Agreement, which will be governed by English law, will have no fixed termination date, but either party will be able to terminate by giving 6 months' notice in the first 24 months' of the agreement, or 12 months' notice thereafter. Otherwise, the Company and Frostrow Capital LLP may terminate the AIFM Agreement in certain limited circumstances.
Under the AIFM Agreement, Frostrow Capital LLP will be entitled to an annual fee of: (a) 0.2% of the higher of (i) £100 million; and (ii) the NAV of the Energy Assets; plus (b) 0.1% of the NAV of the Company less the higher of (i) £100 million; and (ii) the NAV of the Energy Assets, payable by the Company on a monthly basis.
As noted above, Frostrow Capital LLP will delegate its portfolio management functions under the AIFM Agreement to St James's Asset Management. The Portfolio Management Agreement, which is also governed by English law, will have an initial term of seven years, subject to a break option exercisable either by the Company or St James's Asset Management if at least £150 million of equity capital is not raised by the Company within 24 months of the change of investment policy becoming effective (unless a longer period is agreed between the parties). In such a case, a termination fee of £2.5 million will be payable to St James's Asset Management by the Company to enable St James's Asset Management to cover the costs of terminating and winding up its operations.
The Portfolio Management Agreement also contains certain other limited termination rights, but the parties will not be able to terminate without cause. A termination fee of an amount equal to the portfolio management fee which St James's Asset Management would have received in the 12 months' following termination is payable if, among other things: Frostrow Capital LLP or the Company is required to terminate the Portfolio Management Agreement pursuant to the actions of a regulatory authority (where such termination is not brought about by, among other things, the negligence or wilful default of St James's Asset Management); if the Company materially changes its investment policy; or if the scope of St James's Asset Management's appointment is materially altered to comply with regulatory requirements.
Under the Portfolio Management Agreement, St James's Asset Management will be entitled to an annual fee of: 2% of the Company's committed capital and assets under management in respect of the Energy Assets. This fee (as well as certain other agreed costs until a successful fundraising round is completed) will be payable by the Company on a monthly basis.
It is possible that, prior to implementation, certain changes may be made to the legal form of the structure described above without changing the overall commercial arrangements described above.
To effect the Company's proposed investment policy, a new investment team will be formed comprising Robert Rayne, Tom Daniel, Bernard Duroc-Danner and Tony Hayward. Julian Metherell will act as a senior adviser to the investment team.
Robert Rayne, who is currently a non-executive Director of the Company, has over 40 years' experience investing in the energy sector. He has had leadership roles in investment and real estate businesses for 30 years, including as a director and chief executive of London Merchant Securities PLC, the investment division of which was spun out to form the Company in 2007. He is also Chairman of Derwent London PLC and is the senior non-executive director of Weatherford International PLC.
Tom Daniel has over 20 years of alternative investment experience in public markets, private equity and special situations and in the last six years has focused on investment in the natural resources and energy sectors.
Bernard Duroc-Danner, who is currently a non-executive Director of the Company, has been Chairman, President and CEO of Weatherford International PLC since 1988. He has also served on a number of different oilfield service and equipment, oil and gas, and energy boards, holding positions at companies including Arthur D. Little Inc. and Mobil Oil Inc. He is the member of the National Petroleum Council and the Society of Petroleum Engineers.
Tony Hayward has 33 years of experience in board, operational management and investment experience in the global energy industry. He is Chairman of Glencore PLC and Genel Energy PLC. He was also Chief Executive of BP PLC.
Julian Metherell has 25 years of experience in board and operations management and investment execution in the global energy industry. He spent 22 years in investment banking, including four years as head of Goldman Sachs' UK investment banking division. During his time in investment banking, he was primarily focused on advising companies operating in energy-related sectors. He was an executive director and Chief Financial Officer of Genel Energy PLC.
As part of their commitment to the proposed strategy, Tom Daniel and Tony Hayward are proposing to acquire Ordinary Shares to the value of £500,000 each within 12 months of the proposed investment policy becoming effective.
The Board believes that this investment team will provide an excellent platform from which to launch the proposed investment policy.
In particular, the combined team has:
Nick Friedlos, Antony Sweet and Robert Rayne will continue to manage the realisation of the Company's existing portfolio.
If the new investment policy is implemented, the roles of Nick Friedlos and Antony Sweet will change. Nick Friedlos will step down from the Board and will be primarily concerned with realisation of the Legacy Assets. Antony Sweet will remain on the Board as chief financial officer; his role will include assisting with the realisation of Legacy Assets, transitioning the administration of the Company to an externally managed structure and aiming significantly to reduce the costs associated with the legacy structure. Nick Friedlos and Antony Sweet will not participate in any remuneration arrangements associated with the Energy Assets.
Nick Friedlos and Antony Sweet currently have remuneration arrangements under which they are entitled to a bonus of up to a fixed amount by reference to performance criteria linked to the realisation strategy, as set out in the remuneration report of the Company. If the proposed new investment policy is implemented, payments in respect of part of the bonus entitlement under the existing arrangements will be made. The remaining part of the bonus entitlement under the existing arrangements will become subject to a revised scheme, linked to the Legacy Assets, but reflecting the changed strategy of the Company. The overall amount of the bonus will not be increased.
Nick Friedlos will receive £1.3 million and Antony Sweet will receive £650,000 from maximum amounts under the existing arrangements of £2 million and £1 million respectively. The balance of £700,000 for Nick Friedlos and £350,000 for Antony Sweet will be linked to the amount of Legacy Assets realised over a two year period and, in the case of Antony Sweet, will also be linked to a plan to streamline the Company's structure, over what is currently expected to be a 12-month period from the date that the new investment policy is implemented.
Further details of Antony Sweet's remuneration under his employment terms effective after implementation of the new investment policy, including any payments due to Antony Sweet upon termination or a change of control of the Company, are set out in the proposed new remuneration policy in Part 5 of this Circular.
Once the proposed investment policy is implemented, St James's Asset Management will be entitled to send an observer to the Company's board meetings, subject to reasonable exceptions to address conflict issues.
In order to meet the independence requirements for closed-ended investment funds in the Listing Rules, two additional independent non-executive directors will be appointed to the Board before the Company implements the proposed investment policy. The Company will announce these appointments when they are made.
Following the change in investment policy, the Company intends to pay dividends on the Ordinary Shares at such times (if any) and in such amounts (if any) as the Board determines appropriate, provided that the Company will pay dividends only to the extent that to do so is in accordance with all applicable laws and provided further that the Board intends to pay sufficient dividends to enable the Company to qualify as an investment trust for tax purposes.
As the Company's existing directors' remuneration policy is based on a realisation strategy, the policy will need to be changed to reflect the proposed investment policy. The new directors' remuneration policy is set out in Part 5 of this Circular and requires shareholder approval. The new directors' remuneration policy will come into effect when the change in investment policy becomes effective.
Long-term incentives are a key feature of remuneration packages within the private equity and venture capital industry. Many of the Company's competitors offer their senior employees carried interest or co-investment arrangements under which participants share directly in the profits on investments which they manage, with a view to aligning their interests with those of investors.
In line with the industry, the Company operates a number of carried interest plans in relation to its existing investments. No further awards under these plans have been made since the adoption of the realisation policy, nor will any such further awards be made.
It is proposed to set up a new carried interest plan in conjunction with the change in investment policy. The carried interest plan would apply to the investments made under the new investment policy and would be available to members of the new investment team.
The proposed participation of Robert Rayne in the carried interest plan requires the approval of Shareholders as it is characterised as a long term incentive scheme under the Listing Rules. Bernard Duroc-Danner is not currently intending to participate in the carried interest plan.
The Remuneration Committee considers that the participation of Robert Rayne in the carried interest plan is appropriate in view of the expected level of his involvement with the management of investments under the proposed investment policy. The Remuneration Committee believes that the level of Robert Rayne's participation in the carried interest plan will appropriately align his responsibilities with the incentives under the carried interest plan.
The initial allocation of carried interest to Robert Rayne will be 3.1%. This allocation may fluctuate over the life of the carried interest plan on the basis set out in Part 4 of this Circular.
Details of the carried interest plan are set out in Part 4 of this Circular.
A general meeting is being convened at 12.00 p.m. on 12 August 2015 to consider and, if thought fit, pass the Resolutions, as set out in full in the Notice of General Meeting at the end of this document.
In summary, the Resolutions seek the approval of Shareholders:
As noted above, the Directors intend to raise capital within 24 months of the change to investment policy becoming effective, and may use the authority conferred by this resolution in connection with this proposed capital raise to the extent that such capital is raised prior to the Company's 2016 annual general meeting.
All the resolutions are ordinary resolutions, requiring a majority of the votes cast at the General Meeting in order to be passed.
The authority sought pursuant to resolution (d) will apply until the Company's annual general meeting in 2016, at which point a further authority will be sought from Shareholders in relation to the Company's issued share capital as at the date of that meeting. The proposals set out in this Circular are not conditional on the passing of resolution (d).
Shareholders will find enclosed a Form of Proxy for the General Meeting. Whether you propose to attend the General Meeting or not, please complete the Form of Proxy and return it to Capita Asset Services at PXS, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU as soon as possible and, in any event, so as to be received by no later than 12.00 p.m. on 10 August 2015. Completing and returning a Form of Proxy will not preclude you from attending and voting in person at the General Meeting should you wish to do so.
You may also submit your proxies electronically at www.capitashareportal.com using your Investor Code on the Form of Proxy. If you hold Ordinary Shares in CREST, you may appoint a proxy by completing and transmitting a CREST Proxy Instruction to Capita Asset Services so that it is received by no later than 12.00 p.m. on 10 August 2015.
You are advised to read all of the information contained in this Circular before deciding on the course of action you will take in respect of the General Meeting.
The Board considers the change to investment policy and the other proposals in this Circular to be in the best interests of Shareholders as a whole. Accordingly, the Board unanimously recommends that Shareholders vote in favour of the Resolutions at the General Meeting, as the Directors intend to do in respect of their own beneficial holdings of, in aggregate, 4,733,460 Ordinary Shares, representing approximately 3.26% of the Ordinary Shares currently in issue.
The Company has received irrevocable undertakings to vote in favour of the Resolutions from members of the Rayne family and associated trusts in respect of 34.06% of the Ordinary Shares (of which 2.97% comprises the beneficial holding of Robert Rayne).
Yours sincerely,
Martin Knight Chairman
Set out below is the investment policy that would apply to the Company if Shareholder approval is obtained and the other conditions described in this Circular are satisfied.
The Company's investment objective is to generate total returns above market averages through income and long term capital growth by making investments in the global energy sector and related industries, with a particular focus on resource-based and supply chain and services investment opportunities.
The Company will continue its realisation programme in respect of its existing portfolio and intends to reinvest the disposal proceeds (net of an amount required for working capital purposes) in accordance with its revised investment policy.
In selecting investments in the global energy sector and related industries, the Company will target investments that are expected to generate long term capital growth.
The Company intends to invest globally and to build a diversified portfolio of investments across the broad risk spectrum of the energy business. It will not be restricted to making investments in a particular geographic region or energy sub-sector.
The Company's investments will be focused on three core portfolio areas: private equity; public equities; and special situations, including credit opportunities. In terms of private equity, the company intends to focus on the markets and sub-markets below those typically targeted by the larger private equity houses. The intention is that the Company will restrict investments in public equities or special situations to no more than 50% of gross assets (excluding public securities acquired in the context of an intended acquisition of control or take private transaction).
In addition, no one investment made by the Company may (at the time of investment) represent more than 25 per cent. of the Company's gross assets.
The Company may make investments in public or private securities; investments may include, among other things, equity or debt securities arising from new business creations, buy-outs, equity investments, special purpose vehicles, recapitalisations, restructurings, distressed investments and royalty investments. The Company may hold controlling or non-controlling positions in its investments and may invest directly or indirectly.
The Company may, but shall not be required to, incur indebtedness for investment purposes, working capital requirements and to fund own-share purchases up to a maximum of 50% gearing based upon the last published net asset value as at the time of the borrowing. Typically, the Company does not expect to exceed 30% gearing on net assets. For the avoidance of doubt, indebtedness in individual portfolio entities shall be excluded from this test.
The Company may use hedging techniques to manage risk exposure to local currencies, commodities and, in some instances, general equity market or issuer specific price risk.
Over the course of the investment cycle, the Company is intending to make between 10 and 20 investments, comprising small to medium sized deals with an average investment size of £20 million to £40 million per investment, with the aim of providing diversification in the portfolio and generating value for Shareholders.
The Company will initially use its existing cash balances and the proceeds generated from the realisation of its existing portfolio (net of an amount required for working capital purposes) to make new investments.
As to the investment strategy under the proposed investment policy, the new management team intends initially for the Company to make investments in oil and gas special situations assets in the quoted debt and equity markets, with investments in private equity opportunities following in 2016 using the proceeds raised from selling such special situations assets, together with any further proceeds generated from the realisation of LMS Capital's existing portfolio (net of an amount required for working capital purposes).
As at 30 June 2015 (being the latest practicable date prior to the publication of this Circular), the Company's existing portfolio comprised the following assets:
| Unaudited | Audited | |||||
|---|---|---|---|---|---|---|
| 30 June 2015 | 31 December 2014 | |||||
| Asset type | UK £'000 |
US £'000 |
Total £'000 |
UK £'000 |
US £'000 |
Total £'000 |
| Funds | 20,790 | 23,011 | 43,801 | 29,722 | 32,850 | 62,572 |
| Quoted | 1,987 | 11,235 | 13,222 | 1,667 | 18,685 | 20,352 |
| Unquoted | 20,490 | 32,722 | 53,212 | 16,991 | 32,960 | 49,951 |
| 43,267 | 66,968 | 110,235 | 48,380 | 84,495 | 132,875 |
As at 30 June 2015 (being the latest practicable date prior to the publication of this Circular), the net asset value of the Company is approximately £136.1 million, of which approximately £48.5 million is represented by cash and quoted securities.
The Company intends to realise the assets in its existing portfolio in accordance with the strategy it has deployed throughout the period of the realisation strategy. Responsibility for this realisation will remain with the existing LMS Capital management team, as further described in paragraph 5 of Part 1 of this Circular.
All the above figures in relation to the Company's existing portfolio and the Company's net assets are derived from the Company's results for the six months ended 30 June 2015 announced by the Company on 24 July 2015.
Only those risks which are material and currently known to the Company are set out above. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems to be immaterial, may also have an adverse effect on the Company.
A summary of the rules of the carried interest plan is as follows:
Decisions in relation to the participation of members of the new investment team in the carried interest plan will be taken by St. James's Asset Management. To the extent that a member of the new investment team is also a Director of the Company, the decision as to such Director's participation in the carried interest plan will be subject to the approval of the Remuneration Committee.
All members of the new investment team would be eligible to participate in the carried interest plan. Directors of the Company would not be eligible to participate in the carried interest plan unless and until the approval of Shareholders in General Meeting has been obtained for their participation.
The carried interest plan would be effected through a Jersey incorporated limited partnership (''LMS LP''), through which investments would be made in accordance with the new investment policy.
LMS LP would have two limited partners, being the Company and an entity in which the new management team would participate (the ''Carry LP'').
LMS LP will be set up with the general partner being an affiliate of St James's Asset Management. The Company would be entitled to replace the general partner in the event that the Portfolio Management Agreement is terminated.
Carry will be calculated based on the NAV of the Energy Assets (adjusted in accordance with certain agreed policies and principles). Gains on the Legacy Assets will not be subject to the carry arrangements. Carry will be allocated based on both realised and unrealised gains on the investments made in the Energy Assets through LMS LP and on both income received and accrued on such assets.
Carry will be calculated by reference to changes in the adjusted NAV of the Energy Assets at the end of each financial year, and will be allocated only in respect of a financial year in which there is a profit as a result of an increase in such adjusted NAV.
Subject to the high water mark provision described below, any such profit will be allocated, before the allocation of carried interest, to the Company until the aggregate amount allocated to the Company is equal to a preferred return of 5% per annum.
Further profits would then be allocated (subject to certain adjustments) 80% to the Company and 20% to the Carry LP.
The initial allocation of carried interest to Robert Rayne will be 3.1%. This interest will be diluted to the extent that carried interest is allocated to new members of the investment team.
If the proposed equity capital raise is not completed, Robert Rayne will transfer that part of his allocation of carried interest that is in excess of 2% to the Company.
As described above, the profits of LMS LP would be calculated on an annual basis by reference to the adjusted NAV of the Energy Assets but the allocation and distribution of carried interest would be subject to a high watermark provision.
The high watermark provision is designed to ensure that carry is not allocated in instances where the NAV of the Energy Assets, adjusted to take into account capital movements, has fallen and where increases in the adjusted NAV of the Energy Assets are only putting the adjusted NAV of the Energy Assets back to the level it was at before this fall occurred.
Carried interest will not be earned under the carried interest plan in relation to any investments made after St James's Asset Management ceases to provide portfolio management services to the Company under the delegation arrangements described above. However, rights under the carried interest plan in relation to existing investments as at that date of termination would continue and the carried interest plan would terminate once all accrued rights had been satisfied and all investments made whilst it was in effect had been realised.
No provision of the carried interest plan related to:
would be altered to the advantage of any Director of the Company without the prior approval of Shareholders in General Meeting (except for minor amendments to benefit the administration of the carried interest plan and for amendments to take account of changes in legislation or to maintain favourable tax, exchange control or regulatory treatment of participants in the carried interest plan, the Company, or other members of the Group).
Benefits under the carried interest plan would be non-pensionable.
A copy of the terms of the carried interest plan as it relates to Robert Rayne will be available for inspection at the offices of Slaughter and May, One Bunhill Row, London EC1Y 8YY during normal business hours on any Business Day until the close of the General Meeting; and at the place of the General Meeting itself for not less than 15 minutes before and during the General Meeting.
The Company's remuneration policy is designed to ensure that the Company is able to motivate and retain the talented personnel required to run the Company successfully. The Company aims to structure executive remuneration in such a way as to align reward with the best interests of shareholders.
Following the change to its investment policy and the adoption of an externally managed structure, the Company will have only one Executive Director. In the circumstances, the Remuneration Committee did not consider it relevant or appropriate to take into account pay and employment conditions of other employees when setting the policy for Directors' remuneration. Where it considers it appropriate, the Committee consults the Company's financial advisers and shareholders on remuneration issues.
Mr Sweet is the sole Executive Director.
The following table summarises the Company's proposed policy on Directors' remuneration for the three years commencing on implementation of the new investment policy:
| Link to strategy |
Operation | Maximum potential value |
Performance criteria | |
|---|---|---|---|---|
| Base salary | Retention | Reviewed annually based on general economic and market conditions |
Based on market rates |
None |
| Allowances and benefits |
Retention | Health and related insurances. Gym membership |
Based on market rates |
None |
| Pension contributions |
Retention | Base salary only is pensionable |
Company contribution – 15% |
None |
| Realisation Incentive Plan (''RIP'') |
Motivation to optimise realisation of legacy assets and transition Company to new externally managed operating model. |
Based on value returned to shareholders and achievement of agreed transition milestones |
£350,000 | The RIP has two elements:(i) 50% with performance criteria based on amounts realised from the legacy portfolio; and. (ii) 50% linked to transitioning the business from an internally managed investment Company to an externally managed investment trust. (see explanatory note below). |
| Discretionary Bonus | Retention | Reviewed annually based on general economic and market conditions |
Annually with a maximum payment of 100% base salary |
In accordance with objectives set by the Remuneration Committee from time to time (but not to duplicate objectives under the RIP above). |
| Link to strategy |
Operation | Maximum potential value |
Performance criteria | |
|---|---|---|---|---|
| Carried interest – Legacy Assets |
Motivation to maximise investment returns |
Based on a proportion of realised gains on investments after a preferred return or hurdle |
No maximum | Pre-tax investment gains must exceed 6% preferred return or 8% hurdle before any amounts are payable |
Mr Sweet's base salary will be £240,000, with effect from the start of the changed investment policy.
| Name | Annual fee |
|---|---|
| £ | |
| Martin Knight | 60,000 |
| Bernard Duroc-Danner | 40,000 |
| Neil Lerner | 45,000 |
| Robert Rayne | 40,000 |
The fees for Non-executive Directors are reviewed annually – increases will reflect market changes from the above levels.
Mr Rayne was an Executive Director from 6 April 2006 to 1 October 2010, whereupon he became Non-executive. Under Mr Rayne's letter of appointment he participated in the carried interest plan and share option schemes up to the end of 2011, and is entitled to cover under the Company's various insurance policies. The Company will also provide a car, driver and secretary if required in the future, but does not currently do so.
Mr Rayne and Mr Duroc-Danner are members of the Energy Advisory Panel to the external manager and provide advice on the energy markets. Subject to obtaining necessary FCA approvals they will become members of the external portfolio manager. For this Mr Rayne will receive a fee or profit share of £150,000 and will participate in the Energy Assets' carried interest. Mr Duroc-Danner will receive no fee and will not participate in the Energy Assets' carried interest.
The other Non-executive Directors do not participate in the Company's incentive plans or share schemes or other benefits.
The performance criteria following the change in investment policy under the RIP is in two parts, with the first part linked to realisation of the legacy assets, and the second part linked to implementation of a reorganisation plan to streamline the Company's operating structure.
5) The bonus will become payable as the Balance of Legacy Assets are realised and transfers are made. The amount of bonus payable each time a transfer is made will be calculated by reference to the following formula:
(A/£60 million)x£175,000 where
A = amount of transfer
Mr Sweet will be entitled to receive a bonus of up to a further £175,000 linked to implementation of a reorganisation plan to streamline the Company's operating structure. Milestones for the plan have been agreed and achievement of such milestones will form the basis of such bonus payments. The performance period over which the reorganisation plan is currently expected to be achieved is 12 months from the change of investment policy.
If on a future fundraising or other event, the Legacy Assets become managed by the energy team as part of a single asset pool (the ''Energy Assets''), any unpaid portion of each element of the bonus will be paid in full.
In addition to the above, Mr Sweet may receive an additional bonus on an annual basis at the discretion of the Remuneration Committee if additional performance objectives are identified. Any objectives set by the Remuneration Committee in relation to the discretionary bonus will be in addition to, and distinct from, the criteria under the RIP.
If, as a result of a change in the Company's strategy or otherwise, the Remuneration Committee considers that the targets or milestones set are no longer appropriate then the Remuneration Committee may adjust those targets or milestones with the intention that the revised targets or milestones are not either materially easier or materially more difficult to achieve than those originally set. As the milestones and targets are linked to the Company's financial and strategic plan, the Remuneration Committee believes that the targets remain commercially sensitive. They are therefore not disclosed.
Mr Rayne and Mr Sweet participate in the carried interest arrangements in place for staff involved in the management and development of the legacy portfolio. As a result of the implementation of the realisation strategy in relation to the Legacy Assets, no new carried interest arrangements have been instituted, the last year of the arrangements being 2011.
The Company's carried interest arrangements for Legacy Assets are based on annual capital pools for direct investments (i.e. excluding third party funds). Entitlement to carried interest on these pools is calculated as follows:
The percentage of eligible gains which may be allocated to participants in aggregate may not exceed 20%. Participants are allocated a proportion of the overall maximum at the commencement of each annual pool and may be diluted by new joiners during the life of the pool up to a maximum of 20%. The rules also include provision for reduction in the proportion allocated to any participant who ceases to be an employee.
In addition, directors engaged in the management of the Energy Assets will be able to participate in the carried interest plan. For the Energy Assets, carried interest is computed annually at 20% of the profit calculated by reference to the increase in the net asset value of the Energy Assets in excess of a 5% preferred return and is payable on an annual basis. The carried interest is derived through a limited partnership in which the members of the investment team participate as limited partners. The allocation of interests between the members of the investment team is determined by the external portfolio manager.
The external portfolio manager will award a share of the energy carried interest to Mr Rayne.
Amounts payable to Mr Rayne under the carried interest plan will be disclosed in the Remuneration Report of the Company on an annual basis.
No further awards are proposed under the existing share incentive plans.
Mr Rayne and Mr Sweet retain their interests in awards made under these plans in prior years – details of amounts paid during the year and any remaining entitlements as at 31 December 2014 are set out in the Remuneration Committee report on pages 24 to 27 of the 2014 Annual Report.
Mr Sweet has a service agreement which sets out:
Mr Sweet has a rolling service agreement. The agreement for Mr Sweet is summarised below:
| Name | Date of agreement | Notice period |
|---|---|---|
| Antony Sweet | 14 March 2007 | From the Company: 12 months From the Director: 6 months |
Compensation arrangements in the event of termination by the Company without cause are:
At the end of 24 months from the change in investment policy Mr Sweet can give 3 months' notice to the Company and on expiry of this notice period he is entitled to:
In the event of a change in control of the Company, Mr Sweet has the option to terminate his employment; in such circumstances he is entitled to receive the following:
All Non-executive Directors have letters of appointment with the Company. Under their letters of appointment, both Non-executive Directors and the Company are required to give one month's notice to terminate appointments. Non-executive Directors are subject to the re-election requirements under the Company's Articles of Association. There are no provisions for Nonexecutive Directors to receive compensation upon early termination.
The following table provides details of the current Non-executive Directors' letters of appointment:
| Name | Date of appointment | Date of expiry of current term |
|---|---|---|
| Martin Knight | 4 January 2012 | 17 May 2018 |
| Bernard Duroc-Danner | 7 April 2006 | 13 May 2016 |
| Neil Lerner | 4 January 2012 | 17 May 2018 |
| Robert Rayne | 6 April 2006 | 30 September 2016 |
The Remuneration Committee determines all elements of the remuneration package for any new appointee to the Board. The following factors are considered:
The package for a new Director may include all elements provided to current Directors. If necessary to complete the appointment, it may also include compensation for the forfeiture of awards from a previous employer.
The base salary will be set based on market estimates and may therefore vary significantly from current Directors; variable components will be in line with the policy outlined above and, subject to the impact if any of the market determination of base salary, will not exceed the highest amounts paid to the current Directors.
| ''AIFM'' | alternative investment fund manager for the purposes of the AIFM Directive; |
|---|---|
| ''AIFM Agreement'' | the agreement to be entered into between the Company and Frostrow Capital LLP pursuant to which Frostrow Capital LLP is appointed as the Company's AIFM; |
| ''AIFM Directive'' | the Alternative Investment Fund Managers Directive (Directive 2011/61/EU); |
| ''Board'' | the board of Directors of the Company; |
| ''Business Day'' | any day other than a Saturday, Sunday or public holiday on which banks are open in the City of London for the transaction of general commercial business; |
| ''Capita Asset Services'' | Capita Asset Services (the trading name of Capita Registrars Limited) with registered office The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU; |
| ''Company'' or ''LMS Capital'' | LMS Capital plc; |
| ''CREST'' | the relevant system (as defined in the Uncertificated Securities Regulations 2001 (SI 2001/3755) (the ''Regulations'')) in respect of which Euroclear UK & Ireland Limited is the Operator (as defined in the Regulations); |
| ''CREST Proxy Instruction'' | has the meaning given on page 25 of this Circular; |
| ''Directors'' | the directors of LMS Capital, and ''Director'' shall mean any one of them; |
| ''Energy Assets'' | has the meaning given on page 5 of the Circular; |
| ''Financial Conduct Authority'' or ''FCA'' |
the UK Financial Conduct Authority, and any successor entity; |
| ''Form of Proxy'' | the form of proxy for the General Meeting which accompanies this Circular; |
| ''General Meeting'' | the general meeting of the Company to be held at Durrants Hotel, 26-32 George Street, London W1H 5BJ at 12.00 p.m. on 12 August 2015, or any adjournment thereof; |
| ''Group'' | LMS Capital plc, together with its subsidiaries and subsidiary undertakings; |
| ''HMRC'' | HM Revenue & Customs; |
| ''Legacy Assets'' | has the meaning given on page 5 of the Circular; |
| ''Listing Rules'' | the listing rules of the FCA; |
| ''NAV of the Company'' | the net asset value of the Company as calculated in accordance with the valuation policy referred to in the AIFM Agreement; |
| ''NAV of the Energy Assets'' | the net asset value of the Energy Assets as calculated in accordance with the valuation policy referred to in the AIFM Agreement and the Portfolio Management Agreement; |
| ''Ordinary Shares'' | the issued ordinary shares of 10 pence each in the share capital of the Company; |
| ''Portfolio Management Agreement'' |
the agreement to be entered into between the Company, Frostrow Capital LLP and St James's Asset Management pursuant to which Frostrow Capital LLP delegates certain of its key portfolio management functions under the AIFM Agreement to St James's Asset Management; |
| ''Remuneration Committee'' | the remuneration committee of the Company; |
| ''Resolutions'' | the resolutions set out in the Notice of General Meeting; |
''St. James's Asset Management''
St. James's Asset Management LLP (registered number OC376210), whose registered office is 31 St James's Place, London SW1A 1NR, being the vehicle through which the new investment team will operate.
(Incorporated and registered in England with limited liability with registered number 05746555)
NOTICE is hereby given that a General Meeting of LMS Capital plc (the ''Company'') will be held at 12.00 p.m. on 12 August 2015 at Durrants Hotel, 26-32 George Street, London W1H 5BJ to consider and, if thought fit, pass the following resolutions, all of which will be proposed as ordinary resolutions.
Capitalised terms not otherwise defined within this notice shall have the meanings given to them in the circular dated 24 July 2015 of which this notice forms part.
the proposed investment objective and policy described in Part 2 of the circular dated 24 July 2015 of which this notice forms part, be approved and adopted as the investment objective and policy of the Company in substitution for, and to the exclusion of, the Company's existing investment objective and policy;
and so that the Board may impose any limits or restrictions and make any arrangements which it considers necessary or appropriate to deal with treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or any other matter; and
(B) in any other case, up to a nominal amount of £4,841,708.60 (such amount being equal to approximately one third of the issued ordinary share capital of the Company as at the date of this Circular and such amount to be reduced by any allotments or grants made under paragraph 4(A) above in excess of such sum),
such authority to apply, unless previously varied or revoked by the Company in general meeting, until the end of the annual general meeting of the Company in 2016, save that the Company may make offers and enter into agreements during the relevant period which would, or might, require shares to be allotted or rights to subscribe for or convert securities into shares to be granted after the authority ends and the Board may allot shares or grant rights to subscribe for or convert securities into shares in pursuance of any other such offer or agreement as if the authority had not ended.
24 July 2015
By order of the Board
Antony Sweet Company Secretary
Registered office: LMS Capital plc 100 George Street London W1U 8NU
Registered in England and Wales No. 05746555
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