DSM Downing Strategic Micro-cap Investment Trust Plc

Downing Strategic Micro-Cap Investment Trust plc (the "Company")

LEI Number: 213800QMYPUW4POFFX69

Publication of Circular and Notice of Requisitioned General Meeting

As announced on 18 June 2024, the Board of the Company received a request to requisition a general meeting of the Company (the "Requisition") from Vidacos Nominees Limited, acting as nominee of Milkwood Capital Limited ("Milkwood").

The Board considers that Milkwood's decision to lodge the Requisition is wholly self-interested and disruptive when the Board and the Investment Manager are focused on returning cash to Shareholders pursuant to the Managed Wind-Down of the Company, and the Board unanimously recommends that you VOTE AGAINST each of the Requisitioned Resolutions.

The Company has today published a Shareholder circular relating to the Requisition (the "Circular") which contains a notice (the "Notice") of the requisitioned general meeting of the Company that will be held at the offices of Dickson Minto LLP, Dashwood House, 69 Old Broad Street, London EC2M 1QS on 5 August 2024 at 10.00 a.m. (the "Requisitioned General Meeting").

At the Requisitioned General Meeting, Shareholders will be asked to consider the following Requisitioned Resolutions:

§ ordinary resolutions to:      

a)   appoint Rhys Drennan Summerton, André Charles Tonkin and Paul Shackleton as new directors of the Company (the "Proposed Directors");

b)   remove two of the Company's current and experienced directors, being Hugh Aldous and Robert Legget; and

c)   remove any person appointed as a director of the Company between 17 June 2024 (being the date on which the Requisition was received) and immediately prior to the Requisitioned General Meeting; and

§ a special resolution (the "Special Requisitioned Resolution") that directs that:   

a)   the current Board do not declare any dividend, return of capital or other distribution on or prior to the Requisitioned General Meeting; and

b)   the second special interim dividend of 12 pence per Share declared on 28 May 2024 and any other dividend, return of capital or other distribution declared or announced but not paid or made between the date of the Requisition and immediately prior to the Requisitioned General Meeting be cancelled and of no effect.

Notwithstanding the terms of the Special Requisitioned Resolution, Shareholders should note that it will have no impact upon the Special Dividends declared by the Company on 3 April 2024, 28 May 2024 and 17 June 2024.

Shareholders are urged to vote on all the Requisitioned Resolutions and the Board unanimously recommends that you VOTE AGAINST all the Requisitioned Resolutions.

The Notice and the Circular, which contains the full reasons as to why the Board unanimously recommends Shareholders should VOTE AGAINST all the Requisitioned Resolutions, are being posted to Shareholders today and will shortly be available on the Company's website at http://www.downingstrategic.co.uk/. The Notice and the Circular will also shortly be submitted to the National Storage Mechanism of the Financial Conduct Authority and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

A detailed exposition of the reasons as to why the Board unanimously recommends Shareholders should VOTE AGAINST all the Requisitioned Resolutions is set out below. However, by way of a summary:

§ The current Board has worked with the Investment Manager in order to return realisation proceeds to Shareholders in accordance with the Managed Wind-Down (which Shareholders overwhelmingly voted for at the First General Meeting on 28 February 2024) and, to this end, following the payment of the Third Special Dividend will have returned to Shareholders a cash amount, of, in aggregate, approximately £27.4 million, which equates to approximately 90.2 per cent. of the Company's NAV as at 28 February 2024. The Board expects to make further returns to Shareholders, and if the Requisitioned Resolutions are passed, such returns may be jeopardised.   

§ Milkwood's calling of the Requisitioned General Meeting in order to attempt to gain control of the Board is an attempt by Milkwood to acquire the Company's assets on the cheap by avoiding making an offer for the entire Company at a price which appropriately values the Company's remaining assets.

§ Were Shareholders to vote in favour of the Requisitioned Resolutions (or not vote against in sufficient numbers), it may result in Shareholders being locked into a continuing vehicle that would be managed by individuals on whom Shareholders will have little-to-no information from a performance perspective, and the relative illiquidity in the Company's Shares may constrain  Shareholders' ability to sell down their position in the Company should they not wish to continue to invest in it under Milkwood's control.

§ If the Requisitioned Resolutions were passed, the majority of the Board would be made up of Directors nominated by Milkwood, and the current Board believes this outcome would lead to the resulting Board being unable to effectively exercise independent judgement on behalf of all Shareholders.

Hugh Aldous, chairman of Downing Strategic Micro-Cap Investment Trust, said:

"The shareholders in our company have overwhelmingly voted to wind down the trust, and return capital as efficiently as practicable, which is precisely what we have done. To date we have returned 42 pence per share and will return a further 17.5p distribution in July 2024. That works out at a return of actual cash, which investors can dispose of as they wish, of £27.4 million. So far, all Milkwood has done is to try and thwart the process that shareholders have voted for. Calling for a general meeting in order to attempt to gain control of the board, so soon after losing their previous attempt to frustrate shareholders wishes, has only proven to be a further distraction for the Board and has imposed additional unnecessary costs and hassle on shareholders.

"As we have said to Milkwood repeatedly, if they want to take control of the Company and run it in their own specific interests, then they should table a realistic offer that is fair to all shareholders and it will receive due consideration. In the meantime, we urge shareholders to ensure they protect their own interests by rejecting this unwarranted further attempt by Milkwood to acquire control of your Company and its assets on the cheap."

The expected timetable of principal events in relation to the Requisitioned General Meeting is as follows:

Defined terms used in this announcement shall bear the meaning ascribed to them in the Circular, unless the context otherwise requires.

For further information, please contact:

Rationale for Voting Against Each of the Requisitioned Resolutions 

The Board considers that Milkwood's decision to lodge the Requisition is wholly self-interested and disruptive when the Board and the Investment Manager are focused on returning cash to Shareholders pursuant to the Managed Wind-Down of the Company, and the Board unanimously recommends that you VOTE AGAINST each of the Requisitioned Resolutions.           

In support of this recommendation, the Board draw Shareholders' attention to the following matters.

The current Board is independent of the Investment Manager and is acting in the interests of all Shareholders

The current Board comprises three independent non-executive Directors who are committed to doing the right thing for all Shareholders (who overwhelmingly voted to have the Company enter into Managed Wind-Down at the First General Meeting) and to thereby return realisation proceeds to Shareholders in the most prudent manner possible by balancing the need to return cash to Shareholders efficiently whilst also maximising returns.

To this end, the Board has worked with the Investment Manager in order to achieve this outcome whilst also surpassing expectations. As at 5 July 2024, the Company had returned 42 pence per Share pursuant to the First and Second Special Dividends, and will return another 17.5 pence per Share on 18 July 2024 pursuant to the Third Special Dividend. This results in a return of cash, which investors can dispose of as they wish, of, in aggregate, approximately £27.4 million, being approximately 90.2 per cent. of the Company's NAV as at 28 February 2024 (being the date on which the Company entered into its Managed Wind-Down). This return far exceeds the Company's Original Realisation Expectations, and the Board expects to make further returns to Shareholders which may be jeopardised if the Requisitioned Resolutions are passed.    

By contrast, in lodging the Requisition, Milkwood is acting in a wholly self-interested manner in attempting to thwart the process of the Company returning realisation proceeds that Shareholders have overwhelmingly voted for, and upon which the Investment Manager is delivering substantially beyond expectations. Milkwood's calling of the Requisitioned General Meeting in order to attempt to gain control of the Board so soon after losing its previous attempt to frustrate Shareholders' wishes is an attempt by Milkwood to acquire the Company's assets on the cheap by avoiding making an offer for the entire Company at a price which appropriately values the Company's remaining assets. 

Milkwood's actions have also proven to be a distraction for the Board and the Investment Manager that has only served to impose additional unnecessary costs, hassle and uncertainty on Shareholders. The costs incurred by the Company as a result of this disruption have been significant, and Milkwood's actions in frustrating the B Share Scheme denied Shareholders, and particularly retail Shareholders, a tax efficient return of capital. The impact of the costs incurred as a result of Milkwood's actions is further exacerbated by the shrinking size of the Company: following the payment of the Third Special Dividend, the Company will, assuming valuations do not materially change, have net assets of less than £5 million.

Milkwood has not provided granular detail on its past performance

Despite requests from the Board, to date Milkwood has provided no substantive information on the performance of Milkwood's funds under management or details of Milkwood's current portfolio of assets, including granular details of the performance of such assets. Therefore, were Shareholders to vote in favour of the Requisitioned Resolutions (or not vote against in sufficient numbers), it may result in Shareholders being locked into a continuing vehicle that would be managed by individuals on whom Shareholders will have little-to-no information from a performance perspective. The relative illiquidity in the Company's Shares may constrain Shareholders' ability to sell down their position in the Company should they not wish to continue to invest in it under Milkwood's control, and there can be no guarantee liquidity in the Company's Shares would improve should the Requisitioned Resolutions be passed. There can also be no guarantee that Shareholders would receive any return on their investment in the Company under Milkwood's control (either of a capital or income nature) in the short-to-medium term.

By contrast, the Board believes the current Investment Manager remains well positioned to build on its earlier success and realise the Company's remaining assets in such a way as to maximise returns for Shareholders. The Investment Manager has an intimate knowledge of the remaining investments that comprise the Company's portfolio, and is thus in a strong position to appraise the perceived valuation of such investments. The Investment Manager is also familiar with the marketability of those investments and is well placed to judge the best exit route for them, whether it be through brokers, market makers or in-house buyers.

The Proposed Directors' independence and investment trust experience

If the Requisitioned Resolutions were passed, the majority of the Board would be made up of Directors nominated by Milkwood. The current Board believes this outcome would lead to the resulting Board being unable to effectively exercise independent judgement on behalf of all Shareholders. In particular, the Board understands that two of the three Proposed Directors, Mr Summerton and Mr Tonkin, currently hold positions at Milkwood, with Mr Summerton being the founder, owner and Chief Investment Officer of Milkwood and Mr Tonkin an investment analyst at Milkwood. The Board is, therefore, concerned that the Proposed Directors would not bring independent judgement to their proposed role as Directors of the Company and would instead serve the interests of Milkwood as the Company's largest Shareholder. Were this to occur, Shareholders, and particularly retail Shareholders, may find their interests neglected or ignored entirely.

The Board also note that the limited information on the Proposed Directors that has been disclosed to the Board does not suggest that any of the Proposed Directors has been a director of an investment trust. The Board do not, therefore, believe that the Proposed Directors have the requisite experience to form an effective Board that would ensure successful stewardship of the Company for all Shareholders.

The Board has on several occasions made it clear to Milkwood that, should Milkwood wish to take control of the Company, it should make an offer for the entire issued Share capital of the Company at a price which reflects the value of the Company's remaining assets in order to provide all Shareholders with the opportunity to exit the Company equitably. To date, no such offer has been forthcoming from Milkwood. 

The Board, therefore, unanimously recommends that Shareholders protect their own interests and VOTE AGAINST each of the Requisitioned Resolutions.