ARC Capital Holdings Limited: Shareholders Oppose Board Resolutions and Propose Shareholder Resolutions

LONDON, November 18, 2011 -

British Steel Pension Scheme, Henderson Global Investors, Northview Investment Fund, funds managed by QVT Financial LP and VR Capital Group (together, the “Shareholders” or “we“), each holding beneficial interests in the share capital of ARC Capital Holdings Limited (LSE: ARCH) (the “Company”) which in aggregate represent over 25 per cent. of the Company’s outstanding shares announce today that they oppose the resolutions (the “Board Resolutions“) put forward by the current board (the “Board“) of the Company to be considered at the extraordinary general meeting (the “Board EGM“) of the Company to be held on 14 December 2011  and that they have written to the Board requiring them to convene an extraordinary general meeting of the Company to consider a set of alternative resolutions (the “Shareholder Resolutions”), which are appended to this announcement.  

The Shareholders believe that:

1. The Board has rejected changes to the Company’s articles of association that would improve corporate governance provisions;
2. The Board has not adequately addressed shareholders’ investment preferences; and
3. The Board composition should be changed for the benefit of all shareholders.

Accordingly, the Board Resolutions do not adequately remedy the existing, in our view, unsatisfactory situation.

The Shareholder Resolutions will put forward independent directors and provide advisory guidance to promote good corporate governance and support for substantive changes to the Company’s current capital structure.

The Shareholders thus encourage all shareholders to vote against ALL of the Board Resolutions at the Board EGM and to vote in favour of ALL of the Shareholder Resolutions.

This statement reviews the relevant background behind the Shareholder Resolutions in more detail. All shareholders who are interested in learning more are invited to contact Mark Harwood at Georgeson Corporate Advisory at 0800 923 1512 (UK) or +44 207 019 7025 (outside of UK) or by email at ARCShareholders@Georgeson.com.

I. The Board has rejected changes to the Company’s articles of association that would have improved corporate governance provisions

On 20 June 2011, two major shareholders of the Company wrote to the Board to request a number of changes which would have the effect of improving the Company’s corporate governance practices.  These proposed changes included amendments to the Company’s articles of association 1) to require the Company to hold annual general meetings and 2) to reduce the percentage of voting rights in the Company required to requisition an extraordinary general meeting of the Company (the “EGM Threshold”) from 25 per cent. to 10 per cent.  On 16 July 2011, these shareholders received a reply from the Manager on behalf of the Board rejecting all of these shareholders’ requests.  The justification given for not holding annual general meetings was that “Cayman law does not require annual general meetings to be held” and that “given ARCH’s broad international shareholder base any physical location for a meeting is likely to be inconvenient for a large number of shareholders.”  The Shareholders consider that these reasons are inadequate and do not justify limiting shareholders’ opportunity to vote on matters concerning the Company.

On 5 October 2011, a larger group of five shareholders wrote to the Board to request many of the same changes in a further attempt to convince the Company to improve its corporate governance practices.

On 10 November 2011 the Board convened the Board EGM to consider the Board Resolutions. The Board Resolutions include resolutions to hold annual general meetings and to lower the EGM Threshold and are stated to “bring the Company in line with most other AIM-quoted investment companies…”.  

However, the Board Resolutions only contemplate the reduction of the EGM Threshold to 15 per cent., not 10 per cent., which the Shareholders believe is the threshold in place for the vast majority of UK-listed investment companies, and the standard to which they believe the Company should conform.

In addition, the Board Resolutions propose that the first annual general meeting would be held in 2013 rather than 2012. The Shareholders believe that this unduly delays the implementation of improved corporate governance practices and that the Company should hold its first annual general meeting in 2012.

Therefore, we recommend voting FOR Shareholder Resolution 7, which is an advisory resolution, authorising and requesting that the Board hold annual general meetings (endnote 1) and FOR Shareholder Resolution 8, which is an advisory resolution, authorising and requesting the Board to call an extraordinary general meeting of the Company if requested by no less than 10 per cent. of the issued shares (endnote 2), and AGAINST Board Resolution 1.

II. The Board has not adequately addressed shareholders’ investment preferences

The shareholder letter of 5 October 2011 also requested that the Board offer all shareholders a choice as to whether or not to continue their respective investments by restructuring the Company’s capital into continuing and liquidating pools. We believe there may be many long-term investors in the Company who have held their shares since the initial and secondary public offerings and are not satisfied with the Company’s long-term performance, since both the Company’s NAV and share price have underperformed what the Shareholders consider to be relevant benchmarks since each capital raise. The table below shows the total return on a buy and hold basis, in each case measured in USD, of the Company’s share price, the Company’s NAV,  the Hang Seng Index, the CSI 300 Index and the Renminbi from the capital raise dates listed below through to 14 November 2011.

    Commencement
    of period
    (endnote 3)        Company  Company Hang Seng  CSI 300
                     share price  NAV     Index    Index    Renminbi

    Initial public
    offering of the
    Company's shares
    (26 June 2006)      -28%      +6%     +46%     +171%      +26%
    2nd Round
    (3 May 2007)        -47%     -22%     +10%       -4%      +21%
    3rd Round
    (28 April 2008)     -56%     -35%     -14%      -15%      +10%

We are of the opinion that any such long-term shareholders who are not satisfied with the Company’s performance should be entitled to dispose of their respective shareholdings at NAV over time rather than at a steep discount or be forced to have funds reinvested against their will.  Conversely, shareholders electing for continuing shares may benefit from eliminating the “overhang” of shareholders who would prefer to monetise the value of their shares, which may be depressing the share price. We are not aware of persuasive evidence that the liquidity for continuing shares would be adversely impacted by such a restructuring. To the contrary, for example, the continuing shares of Pacific Alliance China Land Limited and Pacific Alliance Asia Opportunities Fund, which were both restructured into continuing and realising shares in 2009, trade with volumes in line with their respective peer groups.(endnote 4)

We believe that such a restructuring should not pressure the Company to sell its assets prematurely or at the wrong price, as such a restructuring would only determine the extent to which sale proceeds are retained, rather than the commercial terms of any portfolio sales. Thus, we disagree strongly with the Board’s statement in the circular (the “Board Circular”) convening the Board EGM that a restructuring is not in shareholders’ interests because “this is not an optimal time to sell portfolio assets”.  The issue at hand is what the Company should do with sale proceeds once they are realised (whether over the short or long term) and not the timing or the manner of the sale of such assets.

While we believe a restructuring of the Company is required, we oppose Board Resolution 3 as we believe that it is premature to ask shareholders to pass a special resolution with respect to such restructuring when the shareholders have not been sufficiently consulted with or provided sufficiently detailed information.  

The Shareholders note that the Board has proposed the implementation of a Discount Control Mechanism (“DCM”). The Shareholders oppose the implementation of such a DCM for several reasons.

Firstly, the DCM is not appropriately defined in the Board Circular. For example, the definition of “Free Cash” given in the circular excludes Renminbi-denominated assets. However, many disposals of the Company’s assets are made in China, and Renminbi is not easy to repatriate. This may lead to inappropriate reinvestment of the proceeds of disposals. Moreover, the definition of “Free Cash” is subjective and could potentially be reduced by committing capital.

Secondly, the price is to be calculated by a 60-day volume-weighted average price whereas the NAV used is to be the preceding quarterly-stated NAV. The use of this NAV measure would introduce a lag in the discount measurement which, in turn, may create material distortions, particularly in today’s volatile markets. For example, if markets perform poorly, then it may appear that the discount has widened and reinvestments will be halted, even if the NAV may have fallen more than the share price.

Thirdly, the DCM does not enable all shareholders to realise their individual investment preferences. Some continuing shareholders may be discouraged that the persistent discount of share price to NAV (which has averaged 25 per cent. over the past three months (endnote 5)) precludes further investment, and some realising shareholders may be understandably frustrated by their inability to dispose of their shares at NAV, even after investing in the Company as a founding shareholder over five years ago.  Therefore, the Shareholders believe that the proposed DCM does not work, and that a division of the Company’s capital into continuing and liquidating shares is in the best interests of all shareholders.

For the above reasons, the Shareholders strongly urge all shareholders to vote AGAINST Board Resolutions 2 and 3 and FOR Shareholder Resolution 9 authorising and requesting that the Board offer each holder of Company shares a one-time election to redenominate such shares as either continuing shares or liquidating shares as set forth in such Resolution (endnote 6).

III. The Board composition should be changed for the benefit of all shareholders

The Shareholders are concerned with the following actions taken by the Board:

• As described above, shareholders’ request that the Company hold annual general meetings and lower the EGM Threshold was rejected, and the Company only reversed its position after a larger group of shareholders wrote again requesting these changes. Even after agreeing to these changes, the Board’s proposals include only holding annual general meetings starting in 2013 rather than immediately in 2012, and include only reducing the EGM Threshold to 15 per cent., rather than 10 per cent. which the Shareholders believe is the industry standard. We believe that the Board should not have resisted, and should not continue resisting, suggested improvements to corporate governance.

• Similarly, the shareholders’ letter of 20 June 2011 requested that the Board reduce the representation of the Manager on the Board, but this request was also rejected.  The Board justified its decision by stating that “at all times since ARCH’s admission to AIM, there have been at least two manager representatives on the Board.” The Shareholders believe that the maintenance of the status quo is not an adequate reason to continue with this practice.  Indeed, the Circular accepts that having two manager representatives on the Board exceeds the AIC Code of Corporate Governance.  The Shareholders are concerned that the Board again only acquiesced to limited implementation of this proposed improvement in corporate governance after further requests by shareholders.

• In the Circular convening the Board EGM, the Company proposes to amend its articles of association to “reconfirm and enshrine” the continuation vote. However, the continuation vote was included in the Company’s AIM admission document dated 20 June 2006. The Shareholders believe that the Company is already obliged to hold a continuation vote in 2013, whether or not Board Resolution 1 passes - and so question what the effect would be of Board Resolution 1 not being passed given the high voting threshold. The Shareholders believe that the Board should not seek to present this proposed amendment to the articles of association as a grant of further rights to shareholders.

• On 1 December 2010, the Board announced a change to its distribution policy from one of distributing all free cash to one in which only income and profits are distributed.  The Shareholders are concerned that this change may have contributed to the widening of the discount to NAV of the Company’s shares from 8 per cent. as of November 2010 (endnote 7) to as much as 44 per cent. (endnote in October 2011 (before subsequently narrowing to approximately 34 per cent. as of 14 November 2011 (endnote 9)).  The Shareholders believe that the Board should be committed to minimising or eliminating any discount to NAV.

• Besides a minor amendment to the form of payment of the performance fee in 2009, the Board has not made any material amendments to the management agreement. We believe that the Company should have sought to renegotiate the Manager’s terms of engagement, given the Manager’s abovementioned performance and that the management agreement was entered into in 2006, prior to the financial crisis, following which asset management terms in the market have become more competitive.

• Although shareholders addressed their letter of 20 June 2011 to the Board, the reply of 16 July 2011 was written and sent by the Manager’s staff. Moreover, the reply to the shareholders’ letter of 5 October 2011 was sent on the Manager’s letterhead before it was re-sent on the Company’s letterhead.

Given these concerns, the Shareholders strongly believe that the Board must be wholly independent of the Manager, and that the current Chairman, who has overseen the Board during this time, should be removed from the Board. To replace the current Chairman and the two Manager representatives currently on the Board, the Shareholders are nominating three new directors:

• Timothy Rucquoi-Berger is one of the two owners/partners of Natixis Private Equity Asia which presently manages and owns a small portfolio of businesses in China.  He previously set up and managed a USD250m private equity fund, Steel Partners China Access I LP. He is a well-known China analyst who has worked in Greater China since 1987.  He was one of the first Westerners to gain access to local government operations as an advisor to the Liaoning provincial government from 1996 to 1999 and then the Shenyang municipal government from 1999 to 2001 where he gained extensive experience restructuring Chinese companies and arranging for trade sale, stock market listing or debt financing.   Mr. Rucquoi-Berger has an extensive network of business and government contacts from over 15 years on the ground investment banking experience in China having worked in M&A, private equity and initially investment banking and research with prestigious firms such as HongKong Bank, Asia Securities and Shenyin. Mr. Rucquoi-Berger was educated at the University of New York and Harvard Business School and is a Belgian native.  He is fluent in French, English and Chinese (Mandarin and Cantonese).

• John Chapman is a lawyer and Chartered Financial Analyst (CFA) specialising in representing shareholder interests in connection with the operation and management of investment funds and ancillary assets.  His experience includes investment funds domiciled in numerous jurisdictions and investing in various asset classes, including debt, equity and property, in both developed and emerging markets.  Mr. Chapman has served as the chairman, an executive director, and as a non-executive director of many publicly traded companies, including AIM-listed funds investing in private equity in emerging markets.   Earlier in his career, Mr. Chapman practiced commercial litigation with a large law firm in New York City, served as a federal prosecutor with the United States Department of Justice handling white collar criminal cases, was a senior manager with Price Waterhouse resident in eastern Europe, was a consultant to the  World Bank and many foreign governments on securities regulation and financial sector development in the Middle East, Africa, Asia and emerging Europe, and was a Senior Advisor to the United States Treasury Department. Mr. Chapman is a member of the New York State Bar Association and the CFA Institute.

• Norman Crighton has more than 20 years’ experience in the closed-end fund industry across a broad set of functional roles including investment banking, institutional sales, corporate finance, research, market making, and investment management. He began his career at Olliff and Partners as an analyst before moving on to the institutional sales desk where he specialised in offshore closed-end funds. In subsequent positions at LCF Edmond de Rothschild and Merrill Lynch, Mr. Crighton broadened his experience into closed-end funds globally and developed corporate finance and restructuring skills in numerous sectors and jurisdictions. At Jefferies International Limited, he led a team involved in all aspects of investment banking for closed-end funds. Most recently, Mr. Crighton ran a hedged portfolio of closed-end funds and led the restructuring of several holdings while employed with Metage Capital Limited.

The Shareholders believe that these changes to the Board are in the interests of all shareholders and urge all shareholders to vote FOR Shareholder Resolutions 1-6 pertaining to the appointment and removal of directors.

Conclusion

We are united in our belief that the Company’s corporate governance practices, capital structure and Board composition should be changed as described above and that the Board Resolutions are inadequate to achieve this. As such, the Shareholders urge all shareholders to vote against ALL of the Board Resolutions and in favour of ALL of the Shareholder Resolutions, as they intend to do so in respect of their beneficial shareholdings.

For further information, please contact:
Domenic Brancati or Mark Harwood
Georgeson Corporate Advisory
Telephone within the United Kingdom: +44-0800-923-1512
Telephone outside of the United Kingdom: +44-207-019-7025
Email: ARCShareholders@Georgeson.com

For media inquiries, please contact:
Shawn Pattison or Patrick Clifford
The Abernathy MacGregor Group
+1-212-371-5999

Notes:

If you are in any doubt as to the action you should take, you should seek your own financial advice immediately from your stockbroker, bank manager, accountant or other independent professional adviser duly authorised under the Financial Services and Markets Act 2000 or, if you are not resident in the United Kingdom, from another appropriately authorised independent financial adviser in your own jurisdiction.

No offer, invitation or inducement to acquire or dispose of shares or other securities in the Company is being made by or in connection with this document.

Endnotes:

(1)  This resolution is advisory in nature and will not amend the Company’s articles of association.

(2)  This resolution is advisory in nature and will not amend the Company’s articles of association.

(3)  Sources for table: Bloomberg and Company releases.

Key assumptions in relation to returns set forth in the table: returns are calculated from the date of the closing of the respective offering at the respective offering amounts; dividends, if any, are reinvested on their respective ex-dividend dates; each investment is realised on 14 November 2011 at the closing price of the relevant security (or the most recent published NAV of 30 September 2011, for the Company NAV return calculation); shareholders did not participate in any of the Company’s tender offers or share buybacks (if shareholders did participate in such tender offers or share buybacks they may have experienced a higher return).

(4)  Sources: Bloomberg, Morningstar.

(5)  Source: Morningstar.

(6)  This resolution is advisory in nature and will not amend the Company’s articles of association.

(7)  Source: Company Announcement of 1 December 2010.

(8)  Source: Company Announcement of 19 October 2011.

(9)  Source: Morningstar.

APPENDIX: Shareholder Resolutions

Ordinary Resolutions

1. THAT Allan Hui Liu be removed from office as a director of the Company with immediate effect.

2. THAT Christopher Marcus Gradel be removed from office as a director of the Company with immediate effect.

3. THAT Guy Heald be removed from office as a director of the Company with immediate effect.

4. THAT Timothy Rucquoi-Berger be appointed as a director of the Company with immediate effect.

5. THAT John Chapman be appointed as a director of the Company with immediate effect.

6. THAT Norman Crighton be appointed as a director of the Company with immediate effect.

7. THAT the Company be authorised and requested to, as soon as is practicable, require annual general meetings of the Company to be held every year.

8. THAT the Company be and hereby is authorised and requested to reduce the number of shares necessary to requisition an extraordinary general meeting of the Company from no less than 25 per cent. to no less than 10 per cent. of the issued shares in the capital of the Company carrying the right of voting at general meetings of the Company.

9. THAT the Company be authorised and requested to offer each holder of shares in its capital a one-time election to redenominate such shares as either continuing shares or liquidating shares in the Company, such that:

a) the Company’s assets and liabilities are divided pari passu into a “continuing pool” and a “liquidating pool” in proportion to the number of shares converted to the associated share class in accordance with the election of the holders of such shares;

b) upon asset sales, the continuing pool may reinvest some or all of the resulting proceeds, whereas the liquidating pool will distribute as much as is practicable of the proceeds of its asset sales;

c) there is no limit on the number of shares which may be redenominated to each share class, and

d) both share classes remain admitted to trading on AIM and retain the voting rights attaching to ordinary shares.

Shawn Pattison or Patrick Clifford, The Abernathy MacGregor Group, +1-212-371-5999