AJIT.L Regulatory News (AJIT)

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1 September 2023

ABRDN JAPAN INVESTMENT TRUST PLC

LEI: 5493007LN438OBLNLM64

Publication of a circular in relation to the recommended proposals for the members' voluntary winding up of the Company and combination with Nippon Active Value Fund plc

The Board of abrdn Japan Investment Trust PLC announces that it has today published a shareholder circular (the "Circular") setting out proposals for the reconstruction and voluntary winding-up of the Company.

Introduction

On 18 May 2023, the Board announced that it had agreed heads of terms with Nippon Active Value Fund plc ("NAVF") in respect of a proposed merger of the Company with NAVF to be effected by way of a scheme of reconstruction and members' voluntary winding up of the Company under Section 110 of the Insolvency Act 1986 (the "Scheme" or "AJIT Scheme") and the issue of New NAVF Shares to Shareholders who elect, or are deemed to have elected, to roll over their investments into NAVF (the "Proposals"). The background and rationale to the Proposals is set out below.

In addition to the AJIT Scheme, the NAVF Board announced on 11 August 2023 details of a proposed combination of NAVF and Atlantis Japan Growth Fund Limited ("AJG" and "the AJG Scheme"), which is in addition to the Proposals of the Company and NAVF. The principal terms of the NAVF and AJG combination are identical to those agreed between the Company and NAVF. Neither combination is conditional upon the other completing.

The Board welcomes news of the AJG Scheme as a second endorsement of the investment strategy of Rising Sun Management Ltd ("Rising Sun"), investment adviser to NAVF. Furthermore, the Board believes it represents the potential for a further scaling up of the combined company with the consequent benefits of greater liquidity for Shareholders as well as the spreading of the fixed costs of NAVF over an even larger base.

The Proposals, which are conditional upon, amongst other things, the approval of Shareholders at the General Meetings, comprise a members' voluntary liquidation and a scheme of reconstruction of the Company under which Shareholders will be entitled to elect to receive in respect of some or all of their Shares:

(a) New NAVF Shares (the "Rollover Option"); and/or

(b) cash (subject to an overall limit of 25 per cent. of the Ordinary Shares in issue) (the "Cash Option").

The default option under the Scheme is for eligible Shareholders to receive New NAVF Shares meaning that Shareholders who, in respect of all or part of their holding of Shares, do not make a valid Election or who do not make an Election at all under the Scheme will be deemed to have elected for New NAVF Shares in respect of such holding.

In order to effect the Scheme and the change in respect of the Company's continuation vote as explained below, Shareholder approval is required at the First General Meeting. If the Scheme is approved at the First General Meeting, Shareholder approval is required at the Second General Meeting to wind up the Company voluntarily and to appoint the Liquidators and grant authority to them to implement the Scheme. Further details of the Scheme Resolutions to be proposed at the General Meetings, the Resolutions to be proposed at the Annual General Meeting and the expected timetable associated with the Proposals are provided below.

The Board considers the Proposals to be in the best interests of Shareholders as a whole and recommends that Shareholders vote in favour of the Resolutions required to implement the Proposals at the General Meetings.

Background to and rationale for the Proposals

The Proposals follow an extensive review by the Board of various investment strategies in the Japan fund sector. The Board believes this review demonstrated that the case for taking advantage of recent corporate governance changes in Japan remains compelling, particularly at the small cap end of the market, where NAVF has performed strongly. The Proposals provide Shareholders with access to a focused and differentiated investment opportunity with a strong track record, a partial cash exit option and a larger continuing investment trust with the prospect of improved liquidity. The combination, if completed, will be implemented through a scheme of reconstruction under section 110 of the Insolvency Act 1986 resulting in the reconstruction and voluntary liquidation of the Company. 

Subject to the adoption of the New NAVF Investment Policy, NAVF's investment objective will be to provide its shareholders with attractive long-term capital growth primarily through the active management of a focused portfolio of quoted companies that have the majority of their operations in, or revenue derived from, Japan, or a majority of whose consolidated net assets are held in Japan, or that are included in the TOPIX, and that have been identified by NAVF's investment adviser, Rising Sun as being undervalued.

The Board and its advisers concluded that the Scheme will offer Shareholders the best way to continue their investment in a closed-ended investment vehicle with exposure to the attractive fundamental drivers operating in the Japanese market, but in a vehicle which has delivered top ranking performance and which has a much better rating than the Company whose Ordinary Shares have traded at a persistently wide discount to net asset value historically. The Proposals also allow Shareholders the opportunity for a partial cash exit at a 2 per cent. discount to FAV per AJIT Share.

Under the Articles of the Company there is a requirement to put a continuation vote to Shareholders at or before the next upcoming AGM. This is due to a technical provision of the Articles which means that if the Company's Ordinary Shares trade at an average discount wider than 10 per cent. over the discount monitoring period to 31 March 2023, a continuation vote is triggered (the "Continuation Vote"). As noted in the announcement of 18 May, it is proposed to subsume the continuation vote into the business of the General Meetings that are being held for the purpose of the Proposals. It is proposed that the Continuation Vote provisions are removed in the amended articles of association to be tabled as part of the Proposals. If the Scheme does not go ahead, these amendments will not be effective and the requirement for the Continuation Vote will remain in the Company's Articles and be voted upon at the AGM which is due to take place immediately after the First General Meeting. The next potential trigger point after this AGM will be in respect of FY23-24. As noted below, if the Scheme does not go ahead, the Board will in any case reassess the options available to the Company.

Benefits of the Proposals

The Directors believe that the Proposals will have the following benefits for Shareholders:

(a) NAVF active management - NAVF's active management approach, which differentiates it from many of its peers, focuses on unlocking value in cash-rich small and mid-cap Japanese companies, an approach which is well aligned with recent developments in Japanese corporate governance and with its structure as a listed UK investment trust. The current NAVF portfolio offers investors a high-conviction uncorrelated opportunity.

(b) Premium listing - In connection with (but prior to completion of) the Scheme, NAVF is proposing to migrate from the Specialist Fund Segment of the Main Market of the London Stock Exchange to a premium listing on the Main Market of the London Stock Exchange, which is expected to improve the access of retail investors to the enlarged fund and therefore its share rating and liquidity. The Scheme is conditional on the Migration, but as noted above not on the completion of the AJG Scheme.

(c) Cost contribution - Rising Sun, the investment manager of NAVF, has demonstrated its conviction in the combined fund by offering to underwrite the Company's current estimated costs of the proposed merger up to £800,000 including advisory and termination fees and associated VAT . The current estimate of costs associated with the Proposals is approximately £725,000 inclusive of VAT and therefore it is likely that Shareholders will not bear any of the costs of the Proposals.

(d) Injection of capital - The Proposals will result in an inflow of capital into NAVF which can be deployed at an advantageous time in the cycle, when recent government reforms support, more than ever in the Board's view, NAVF's strategy of finding undervalued Japanese listed companies and actively engaging with them to deliver improved returns for shareholders.

(e) Increase in scale, spread of costs - The combination with NAVF is expected to improve the enlarged fund's liquidity for all shareholders as well as spreading the fixed costs of NAVF, as the continuing entity, over a larger pool of assets. As at the Latest Practicable Date, the net asset value of the Company was £83.4m and the net asset value of NAVF was £168.0m.

(f) Opportunity for substantial cash exit - The Proposals include a cash exit opportunity of up to 25 per cent. of the Company's shares in issue, providing Shareholders with the ability to realise part (or potentially all) of their investment at a 2 per cent. discount to FAV per AJIT Share.

(g) Uplift in market value - The Proposals also have the potential to deliver an uplift in the market value of a Shareholder's investment due to the narrower discount to net asset value at which the NAVF Shares might reasonably be expected to trade over the longer term.

NAVF

Shareholders who elect (or are deemed to elect) for the Rollover Option will be electing to receive New NAVF Shares.

NAVF is a closed-ended investment company incorporated in England and Wales on 22 October 2019 as a public limited company, registered number 12275668. It is an investment company as defined by section 833 of the Companies Act and operates as an investment trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.

The NAVF Shares were first admitted to trading on the Specialist Fund Segment on 21 February 2020. It is expected that the NAVF Shares will be admitted to the Official List and to trading on the premium segment of the Main Market on 21 September 2023. The Scheme is conditional upon the Migration.

NAVF has appointed FundRock Management Company (Guernsey) Limited as its alternative investment fund manager ("AIFM") to provide overall portfolio and risk management services to NAVF. The AIFM and NAVF have appointed Rising Sun as investment adviser to provide investment advisory services to the AIFM and NAVF in respect of NAVF's portfolio of investments.

NAVF seeks to achieve its investment objective by taking advantage of the corporate governance reforms in Japan and utilising the increased focus on good corporate governance to engage with management teams, unlock value and encourage investee companies to improve returns to their shareholders.

It is expected that Claire Boyle, the Chair of the Company's audit committee, will join the NAVF Board on completion of the Scheme.

Conditions of the Proposals

Implementation of the Proposals is subject to a number of conditions, including:

(h) Completion of the Migration (which is subject to NAVF Shareholder approval);

(i) the recommendation of the boards of the Company and NAVF to proceed with the Proposals which may be withdrawn at any time (including, without limit, for material adverse change reasons);

(j) the passing of the Resolutions to be proposed at the First General Meeting and the Resolution to be proposed at the Second General Meeting, or any adjournment of those meetings and upon any conditions of such Resolutions being fulfilled;

(k) the NAVF Share Allotment Authorities relating, inter alia, to the Scheme being approved by NAVF Shareholders and not having been revoked or superseded; and

(l) approval by the FCA of the publication of the NAVF Prospectus.

Any condition may, subject to compliance with legal requirements, be waived with the mutual agreement of each of the Company, NAVF and Rising Sun at any time up to completion of the Scheme.

If any condition is not satisfied (or waived), the Proposals will not become effective, the Company will not proceed with the winding-up and instead will continue in existence. Shareholders of the Company will bear any abort costs incurred if the Proposals do not become effective. In these circumstances, the Directors will reassess the options available to the Company at that time.

Costs of implementing the Scheme

The costs of the Scheme payable by the Company are expected to be approximately £725,000 inclusive of VAT which, for the purposes of this calculation, is assumed to be irrecoverable where applicable. Rising Sun has agreed to pay the Company's costs of the Scheme up to £800,000, and therefore it is likely that Shareholders will not bear any of the costs of the Scheme. To the extent that the Company's costs of the Scheme are above £800,000, the Company will bear these costs.

The estimate of the Company's costs excludes the Liquidators' retention to cover unknown liabilities (estimated at £100,000), and does not take account of any dealing costs which will be incurred by the Company in disposing of assets in order to repay the existing debt facilities, fund the Cash Option, and fund the Liquidation Pool.

Except for these purposes, it is expected that AJIT will not liquidate its portfolio but will remain invested in accordance with its published investment policy, and will largely transfer its portfolio to NAVF in specie rather than as cash or cash equivalents. This structure has been agreed to avoid unnecessary dealing costs in connection with the disposal of the AJIT portfolio and to avoid unnecessary periods when Shareholders' funds are not invested in the Japanese market.

Although there are not expected to be any costs incurred in connection with the realignment of the portfolio in respect of the Rollover Pool, there may be dealing costs incurred by NAVF following the completion of the Scheme to the extent that NAVF disposes of the existing AJIT portfolio and redeploys into activist opportunities.

In the event that the Scheme does not proceed then each party will bear their own costs in connection with the Proposals.

The Liquidators' retention is estimated at £100,000 and will be retained by the Liquidators to meet any unknown or unascertained liabilities of the Company. To the extent that some or all of the Liquidators' retention remains when the Liquidators decide to close the liquidation, this will be returned to Shareholders that were on the Register as at the Record Date.

Entitlements under the Scheme

Under the Scheme, each Shareholder on the Register on the Record Date may elect to receive:

(m) such number of New NAVF Shares as have a value equal to the proportion of the Rollover Pool attributable to the number of Ordinary Shares so Elected, for the Rollover Option; or

(n) subject to an overall 25 per cent. cap on such Elections (in aggregate), an amount of cash equal to the Cash NAV per Share multiplied by the number of Ordinary Shares so Elected, being the Cash Option.

Shareholders can make different Elections in respect of different parts of their holdings.

The default option under the Scheme is to receive New NAVF Shares, meaning that eligible Shareholders who, in respect of all or part of their holding of Ordinary Shares, do not make a valid Election, or who do not make an Election, will be deemed to have elected for New NAVF Shares in respect of such holding.

After allocating cash and other assets to the Liquidation Pool to meet all known and unknown liabilities of the Company and other contingencies, including the retention and the entitlements of any Dissenting Shareholders, there shall be appropriated to the Cash Pool and the Rollover Pool the remaining assets of the Company in the manner described in the Circular. Such appropriation includes the application of a discount of 2 per cent. to FAV per AJIT Share in relation to those Shares in respect of which Shareholders have elected to receive cash. The value arising from the application of the Cash Option Discount shall be allocated to the Rollover Pool for the benefit of Shareholders electing, or deemed to have elected for, the Rollover Option. In the week commencing 16 October 2023, it is expected that the Liquidators shall distribute to Shareholders who have elected for the Cash Option their Cash Entitlements, being rounded down to the nearest penny.

For illustrative purposes only, had the Calculation Date been 5.00 p.m. on the Latest Practicable Date and assuming that no Shareholders exercise their right to dissent from participation in the Scheme, after deduction of the Dividend and assuming that the maximum amount is elected for the Cash Option, the AJIT FAV per Share would have been 673.083880 pence and the NAVF FAV per Share would have been 148.153178 pence which, for the Rollover Option, would have produced a conversion ratio of 4.543162 and, in aggregate, 42,360,524 New NAVF Shares would have been issued to Shareholders who elected for the Rollover Option under the Scheme.

The above figures are for illustrative purposes only and do not represent forecasts. The AJIT FAV per Share and NAVF FAV per Share and Shareholders' entitlements under the Proposals may materially change up to the Effective Date as a result of, inter alia, changes in the value of investments. 

Scaling back of Elections for the Cash Option

The maximum number of Ordinary Shares (in aggregate) that can be elected for the Cash Option is 25 per cent. of the total number of Ordinary Shares in issue (excluding Ordinary Shares held in treasury). Shareholders are entitled to elect for the Cash Option in respect of more than 25 per cent. of their individual holdings of Ordinary Shares (the "Basic Entitlement", such excess amount being an "Excess Application"). However, if aggregate Elections are made for the Cash Option which exceed 25 per cent. of the issued Ordinary Shares (excluding Ordinary Shares held in treasury), Shareholders who have made an Election for the Cash Option in excess of their Basic Entitlement shall have their Excess Applications scaled back in a manner which is, as near as practicable, pro rata to the number of Shares elected under such Excess Applications, resulting in such Shareholders (other than Excluded Shareholders) receiving New NAVF Shares instead of cash in respect of part of their holding of Ordinary Shares.

dividend

As an investment trust, the Company is not permitted to retain more than 15 per cent. of its income in any accounting period. If the Scheme is successful, that condition requires to be met in the shortened accounting period commencing on 1 April 2023 and ending on the Effective Date. In order to meet this requirement, the Company is separately announcing today an interim dividend of 3 pence per Ordinary Share, to be paid to Shareholders on the Register as at 15 September 2023. The expected payment date for the Dividend is 29 September 2023.

Apart from the Dividend, it is not anticipated that there will be any dividends paid by the Company in relation to the current financial period or for the period up to the liquidation of the Company.

GENERAL meetings

The implementation of the Proposals will require two general meetings of the Company. The notices convening the First General Meeting (to be held at 4.00 p.m. on 28 September 2023) and the Second General Meeting (to be held at 3.00 p.m. on 10 October 2023) are set out in the Circular.

annual general meeting

Under the Companies Act, the Company is required to hold its annual general meeting within six months of its financial year end. It is proposed that this technically required AGM will follow the First General Meeting. This will include standard AGM resolutions to (amongst other things) reappoint the Directors, approve the Directors' Remuneration Policy, re-elect the Directors and renew its share allotment and share buyback authorities.

The Company's AGM will be held at 4.30 p.m. on 28 September 2023 at Dentons UK & Middle East LLP, 1 Fleet Place, London EC4M 7WS, which is immediately following the First General Meeting.

If the Scheme Resolutions at the First General Meeting are not passed, as noted above the Continuation Vote will be held at the AGM.

The Board recommend voting in favour of all the resolutions to be put forward at the AGM and believe they are in the best interests of the Company. If the Scheme Resolutions do not pass, the Board support the continuation of the Company but as noted in this document the Board will consider carefully the future options for the Company. 

Recommendation and voting intentions

The Board considers the Proposals and the Resolutions to be proposed at the General Meetings to be in the best interests of Shareholders as a whole.

Accordingly, the Board unanimously recommends Shareholders to vote in favour of the Resolutions, as the Directors intend to do in respect of their own beneficial holdings, which total 5,313 Ordinary Shares (representing 0.043 per cent. of the Company's total voting rights) as at the Latest Practicable Date. The Directors who hold Ordinary Shares (being Karen Brade and David Warren) intend to roll over their entire beneficial holdings of Shares into New NAVF Shares. 

EXPECTED TIMETABLE

Note: All references to time in the Circular are to UK time. Each of the times and dates in the above expected timetable (other than in relation to the General Meetings) may be extended or brought forward. If any of the above times and/or dates change, the revised time(s) and/ordate(s) will be notiï¬ed to Shareholders by an announcement through a Regulatory Information Service.

A copy of the Circular has been submitted to the National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism. The Circular will also shortly be available on the Company's website at www.abrdnjapan.co.uk.co.uk where further information on the Company can also be found.

Capitalised terms used but not defined in this announcement will have the same meaning as set out in the Circular dated 1 September 2023.

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