20th Nov 2006 15:36
Primary Health Properties PLC20 November 2006 20 November 2006 Primary Health Properties PLC ("PHP" or "the Company") Proposed Conversion to UK- REIT Highlights • PHP, the provider of modern primary healthcare facilities, announces that it has today written to shareholders requesting approval for conversion to REIT status • Conversion enables significant annual tax savings on income and eliminates capital gains tax paid on disposal of assets • Subject to shareholder approval, company could convert as early as 1 Jan 2007 • Company to pay minimum of 90% of the profits of the tax exempt business by way of dividends - in line with current dividend policy • Conversion expected to incur one-off charge of £4.5m, based on value of assets to form tax exempt business as at 30 June 2006 - PHP intends to elect to pay the conversion charge in four installments • Circular submitted to UK Listing Authority and to be posted today to shareholders • An Extraordinary General Meeting to be held on 18 December 2006 at 11 am in the Board Room, Ground Floor, Ryder Court, 14 Ryder Street, London SW1Y 6QB Further information detailing the Circular and the potential benefits toshareholders and background to UK-REIT conversion are below. Harry Hyman, Executive Managing Director of PHP, said: "We believe that conversion to a UK registered REIT is a highly attractiveopportunity for investors in PHP. We have always adopted a policy of maximumpossible distribution of after tax profits and REIT status allows us to enhancethis policy. The gains we make on tax transparency will be passed directly toour shareholders, thereby maximising their returns - something that we havealways believed in and adhered to since listing ten years ago." -ends- Enquiries: Bell Pottinger Corporate & Financial David Rydell/ Victoria Geoghegan Tel: 020 7861 3232 Primary Health Properties PLC Harry Hyman, Managing Director Tel: 01483 306912 Notice of Extraordinary General Meeting and Proposed Amendments to the Articlesof Association for the Purposes of the Company Converting to a UK-REIT Letter from the Chairman Dear Shareholder UK-REIT conversion 1. Introduction I am writing to you to explain why the Board of PHP is recommending that theCompany convert itself into a UK-REIT. After many years of lobbying by the property industry, primary UK-REITlegislation was enacted on 19 July 2006 with regulations published on 1 November2006. This will facilitate the holding of property in a UK based corporatestructure on a tax neutral basis. The Directors believe that its business,distribution policy and gearing levels are likely to allow PHP and itssubsidiaries to qualify as a UK-REIT. The benefits of this to the Company are that all future capital gains will, solong as PHP continues to meet the relevant qualifying conditions accrue in a taxfree environment and there will no longer be a requirement to provide fordeferred taxation. In addition PHP will not have to pay taxation in respect ofits net qualifying income. The deferred taxation provided in the Group'saccounts at 30 June 2006 was £21m. The existing dividend policy under which PHP distributes substantially all ofits distributable profits by way of dividend will not be altered and theDirectors anticipate that this will enable the Company to satisfy the 90% test. The cost of conversion is an entry charge of 2% of the Group's net assets whichcan alternatively, by election, be paid in four instalments (where the rate is2.19%). It is intended that the Company will elect for the instalment option.Assuming that conversion took place at 30 June 2006, the date of the Group'slast available balance sheet, then the charge would be £4.5m. In order to facilitate the Company operating efficiently as a UK-REIT, certainchanges are required to the Articles of Association. These changes take accountof the UK-REIT legislation contained in Part 4 of the Finance Act 2006 and theregulations made thereunder (the "UK-REIT regime"), specifically the UK-REITrules regarding the payment of dividends to Substantial Shareholders. I am writing to explain the background to the proposed changes to the Articlesof Association which are being submitted for approval at the ExtraordinaryGeneral Meeting and why the Board thinks that they are in the best interests ofshareholders as a whole. Set out at the end of this document is a noticeconvening the Extraordinary General Meeting, which sets out the text of theproposed amendments to the Articles of Association. If approved by Shareholders, the proposed amendments to the Articles ofAssociation will not take effect unless the Board elects for UK-REIT status.The Extraordinary General Meeting will be held at the Board Room, Ground Floor,Ryder Court, 14 Ryder Street, London SW1Y 6QB on 18 December 2006 at 11 a.m.There is also enclosed a Form of Proxy to enable you to vote on the resolutionshould you be unable to attend the meeting. This document provides you with details of the proposals and explains why theBoard believes they are in the best interests of shareholders as a whole. Inorder to assist your consideration of these proposals this letter also includes: - background information on what a UK-REIT is; - details of the advantages, both for the Company and its shareholders, of becoming a UK-REIT and the anticipated costs of conversion; and - an explanation of why the Board believes it is in the best interests of shareholders for the Company to elect to convert into a UK-REIT. 2. Background to conversion to a UK-REIT a) What is a UK-REIT? A UK-REIT is a company that either itself owns and operates income-producingreal estate investments, which can be commercial or residential, or comprises agroup of companies which carries out these activities. Most of this income isdistributed to shareholders and in return the company is exempt from corporationtax on profits and gains relating to its qualifying property rental business. Converting into a UK-REIT does not materially alter the group of companies'business or operations, but is merely a more tax-efficient structure. UK-REITsare intended to enable the income from rented property assets to be earned in atax efficient way and to ensure that the return from investing in a propertycompany is more aligned with direct property investment. A group of companies which elects for UK REIT status is permitted to carry onboth tax-free property rental activities and other, taxable activities, subjectto certain restrictions which are set out below. Electing for UK-REIT statusdoes not change the legal status of the company or its share capital. b) A global trend Real estate investment trusts and similar structures have become a global trend,trading successfully in North America (USA and Canada), Australia, Asia-Pacific(Japan, Singapore, Hong Kong, Malaysia, Thailand, South Korea and Taiwan) andEurope (The Netherlands, Belgium, Greece and France). The UK-REIT regimecommences from 1 January 2007 and Germany is currently considering introducing aGerman real estate investment Trust in the near future. c) Key conditions to become a UK-REIT In order to qualify as a UK-REIT, a group of companies will need to meet certainconditions. The key features are as follows: - the parent company must be a solely UK resident company whose ordinary shares are listed on a recognised stock exchange (which includes the Official List but does not include the AIM market) and not be an open-ended investment company; - the parent company must not be a "close company"; - the property rental business, whether Tax Exempt (within the UK) or overseas, should comprise at least 75% of the overall group's activities, measured by reference to both the value of its assets and its total profits; - a minimum of 90% of the UK-REIT's "profits" (calculated under UK tax principles after interest and capital allowances and excluding chargeable gains) from the Tax Exempt business must be distributed to investors. This distribution is referred to as a property income distribution or "PID"; and, - with some exceptions, the UK-REIT will be required to withhold basic rate tax on the payment of a PID (please refer to the additional tax information in Part III) of this document. PHP satisfies all the above conditions for conversion into a UK-REIT and theBoard expects the Group to continue doing so in the future. The Group has beenpreparing for conversion for many months to ensure a smooth transition. In addition to the above conditions, as a UK-REIT, the Group needs to meetcertain other conditions in order to maximise tax efficiency as follows: - the Group will be subject to a financing costs-cover test on the Tax-Exempt Business. This is a form of gearing test. The Group will need to be within the limits envisaged by the test to avoid an additional tax charge. - the Company would suffer a significant tax penalty in the event that distributions are made to any corporate shareholder who is beneficially entitled to 10% or more of the shares of the Company, or to 10% or more of dividends declared, or who controls 10% or more of the voting power. Further details are set out in k) below. The Group can protect itself against the risk of this tax penalty provided it can demonstrate it has taken reasonable steps to avoid paying distributions to such Substantial Shareholders. The proposed amendments to the Articles of Association should enable the Group to satisfy this requirement. d) Further Information on the UK-REIT regime Further information on the UK-REIT regime is set out in Part II of thisdocument. e) Timing The legislation to enable the establishment of UK-REITs was contained in theFinance Act 2006 which became law on 19 July 2006. The detailed regulations thatwill govern the UK-REIT regime were published on 1 November 2006. HMRC areintending to publish guidance on certain areas although this is only availablein draft form at the date this letter is written. The Board will review suchguidance as is available prior to conversion into a UK-REIT and will not proceedwith the conversion if there are, or are likely to be, material changes that theBoard considers would be adverse for the Company or would affect theconsequences of conversion for shareholders in a way that is materiallydifferent to that described in this document. This legislation provides that a company satisfying the conditions for UK-REITstatus may elect to convert on, or after, 1 January 2007, provided that it hasserved notice to HMRC of its intention to convert prior to the conversion date. The Board, subject to the passing of the resolution at the EGM convened for 18December 2006 and the review of any guidance published by the HMRC after thedate of this letter as referred to above, intends to serve notice of conversionon or before 29 December 2006 in order to achieve UK-REIT status for the Groupon 1 January 2007. f) Advantages of becoming a UK-REIT By converting to a UK-REIT, UK resident members of the Group will no longer paycorporation tax on the profits and gains from their qualifying property rentalbusiness in the UK provided that it meets certain conditions. This willeffectively reduce the burden of taxation for most shareholders in respect ofthe Tax-Exempt Business and enable them to gain access to more flexible indirectproperty investments for their portfolios. Non-qualifying profits will continueto be subject to corporation tax as normal. For PHP, this will mean significant annual tax savings on its property incomeand the elimination of tax which would otherwise arise in respect of capitalgains realised on the disposal of assets. This will lead to the eradication ofthe contingent tax liability of £21.2 million, representing the deferred taxliability provided in the Group's accounts as at 30 June 2006. The elimination of this potential tax exposure (which will also apply to anyfuture gains in the value of the Group's qualifying property investment assets)means that the Group will have more flexibility, post UK-REIT conversion, withregard to its investment assets as it can dispose of them without incurring atax charge. Furthermore, as the Group will not suffer corporation tax on incomeand gains relating to its UK investment assets, it should be able to return moreto shareholders. g) The cost of conversion to UK-REIT status The entry cost of conversion to UK-REIT status has been set by the UK Treasuryat 2% of the market value of the assets within the Tax Exempt Businessimmediately prior to entry into the UK-REIT regime (2.19% if the option to payin instalments is taken). PHP intends to elect to pay the conversion charge in four instalments so, inPHP's case, this would mean a conversion charge of £4.5 million, based on thevalue of the assets that will form the Tax Exempt Business as at 30 June 2006.The actual conversion charge will depend on the value of the assets as at 31December 2006. See page 17 of this document for further detail. h) Dividend policy The Company intends to employ the same dividend policy following UK-REITconversion as it does now and the Board expects that this will comfortablyexceed the required PID distribution. Following UK-REIT conversion, distributions from the Company may comprise PIDs,ordinary corporate dividends or a combination of the two. The Company will berequired to distribute to shareholders (by way of dividend), on or before thefiling date of the Company's tax return for the accounting period in question,at least 90% of the income profits of the Tax-Exempt Business (broadly,calculated using normal tax rules) of the UK-resident members of the Group inrespect of their Tax-Exempt Business and of the non-UK resident members of theGroup insofar as they derive from their UK qualifying property rental businessarising in each accounting period. Subject to certain exceptions, these PIDswill be subject to withholding tax at the basic rate of income tax (currently22%). Companies may decide to distribute additional amounts over and above theminimum PID, in which case such amounts will be treated as ordinary corporatedividends or as a PID, dependent on their source. For further detail, pleasesee Part II of this document. In order to pay a PID without withholding tax, the Company will need to besatisfied that the shareholder concerned is entitled to that treatment. Forthat purpose, the Company will require such shareholders to submit a valid claimform (copies of which may be obtained on request) from the Company's Registrars,Capita Registrars). The precise proportion of recurring property rental income that the Groupdistributes may vary between years and will be flexed as appropriate, accordingto the needs of the business. Ordinarily, however, the Board would expect todistribute a high proportion (including the mandatory PID element) of recurringproperty rental earnings, on the basis of adjusted earnings per share asreported under IFRS. A proportion of trading property profits and other incomefrom non-property activities may also be distributed, to the extent the Boardregards those earnings as sustainable. Capital gains arising on the disposal ofinvestment properties will, ordinarily, be retained/recycled within the businessto support future growth. Had the Group previously been operating as a UK-REIT and the profit anddistribution levels remain unchanged, the PID element of those distributionsmade in previous financial years would not have been significant, as illustratedin the table below. 2003 2004 2005 2006 (audited) (audited) (audited) (audited) Details from accounts Profit before tax UK GAAP 2,179,000 2,472,000 3,030,000 n/a IFRS 1 n/a n/a 19,387,000 18,403,000 Actual dividend paid 1,740,000 1,995,000 2,658,000 3,062,000 Theoretical PID if REIT conversion had been available in earlier periods Estimated Taxable profits 2 78,074 Nil 60,900 624,217 3 Notional PID 4 70,267 Nil 54,810 561,795 1 The PBT under IFRS is substantially higher than under UK GAAP as it includesthe revaluation of properties. 2.The taxable profits for 2003 have been agreed with HM Revenue & Customs(HMRC). However, the corporation tax return for the 2004 and 2005 year ends arestill open to enquiry by HMRC and the 2006 year end return is yet to besubmitted and is therefore an estimate. 3 The significant estimated taxable profit seen in the year ended 30 June 2006is due to the chargeable gains arising on the sale of two investment properties.Had these disposals not taken place, the taxable profits for the year would havebeen nil, and therefore no PID would have been required. 4 Under the REIT legislation the PID must be 90% of taxable profits of theproperty rental business. Since, substantially all of the profits relate to theproperty rental business, for the purposes of this table, we have calculated thePID as 90% of total taxable profits. i) Tax position of the Company's shareholders The comments in this section are provided for general guidance only.Shareholders who are in any doubt concerning the taxation implications of anymatters reflected here should consult their professional advisers. As discussed in h) above, distributions from the Company may comprise PIDs,ordinary corporate dividends or a combination of the two. If, as describedabove, capital gains are recycled, only distributions of profits after interestdeductions and capital allowances will constitute PIDs. Other dividends will betaxed as normal in the hands of Shareholders. Further detail in respect of theattribution of distributions is included in Part II of this document. Broadly, PIDs are treated for UK tax purposes in the hands of the shareholdersas property rental income rather than dividends. They may be subject towithholding at source, at the basic rate of UK income tax of 22%. Additional UKtaxes may be payable. Certain shareholders may have their liability to taxreduced, for example through the operation of a double tax treaty. A generalguide to the treatment for the principal classes of shareholders is set out inPart III of this document. j) The 10% rule Under the UK-REIT regime, a tax charge may be levied on the Company if theCompany makes a distribution to a Substantial Shareholder unless the Company hastaken reasonable steps to avoid such a distribution being paid. Shareholdersshould note that this restriction only applies to shareholders that are bodiescorporate and to certain entities which are deemed to be bodies corporate. Itdoes not apply to nominees. The background to the charge recognises that in certain circumstances suchshareholders resident in jurisdictions with favourable double tax agreementswith the UK can reclaim all or part of the UK income tax payable by them on thedividend. The charge seeks to collect from the Company an amount of corporationtax equivalent to the basic rate income tax liability on the dividendirrespective of the tax treatment of the shareholder. A tax charge may be imposed only if a UK-REIT pays a dividend in respect of aSubstantial Shareholding and the dividend is paid to a person who is aSubstantial Shareholder. The charge is not triggered merely because ashareholder has a stake in the company of 10% or more. Neither is the tax chargetriggered if the person beneficially entitled to the dividend is not also aSubstantial Shareholder. The amount is calculated by reference to the dividendthat is paid to the Substantial Shareholder and is NOT restricted to the excessover 10%. The tax charge imposes an amount of corporation tax payable by the Companyequivalent to income tax at the basic rate on the dividend paid to theSubstantial Shareholder. 3. Proposed changes to the Articles of Association Whilst the Company has not identified any Substantial Shareholding to which the10% rule would apply, the Board considers it appropriate that the Company shouldput in place the mechanisms anticipated by the guidance issued by HMRC so thatthe Company can avoid the imposition of such a tax charge. The changes proposed to be made to the Articles of Association will give theBoard the powers it needs to demonstrate to HMRC that such "reasonable steps"have been taken. These proposals are consistent with the draft guidancepublished by HMRC. The proposed amendments to the Articles of Association are set out in the noticeconvening a Extraordinary General Meeting of the Company appearing on pages 31to 39 of this document and a description of those amendments is set out in PartIV of this circular: - a right for the Board to require information in relation to any shares in order to determine whether the shares form part of a Substantial Shareholding; - that dividends will not be paid on shares forming part of a Substantial Shareholding if the Board is not satisfied that ownership of dividends has been disposed of ; - that dividends will not be paid on shares where there has been a failure to provide information requested in order to determine if a shareholding is a Substantial Shareholding; - that dividends will not be paid on shares in any other case, if the Board believes the shares may form part of a Substantial Shareholding; - that dividends not paid may be released if certain information is supplied or certification given that the dividend will not belong to a person with a Substantial Shareholding; - that trust arrangements may be put in place to prevent a person with a possible Substantial Shareholding being entitled to that dividend; - a right to require that shares forming part of a Substantial Shareholding are disposed of where a shareholder does not provide information about beneficial ownership of the shares on request from the Board or fails to transfer the entitlement to the dividend to a person who is not a Substantial Shareholder or fails to take action or provide information so that any dividend withheld or held on trust is so transferred. The Articles of Association may be amended by special resolution passed by theshareholders of the Company in the future, including to give powers to theDirectors to ensure that the Company can comply with the close company conditiondescribed in Part II of this document, which powers may include the ability toarrange for the sale of shares on behalf of shareholders. 4. Exit from the UK-REIT regime The Company can give notice to HMRC that it wants the Group to leave the UK-REITregime at any time. The Board retains the right to decide to exit the UK-REITregime at any time in the future without shareholder consent if it considersthis to be in the best interests of the Group. If the Group voluntarily leaves the UK-REIT regime within ten years of joiningand disposes of any property that was involved in its Tax-Exempt Business withintwo years of leaving, any uplift in the base cost of the property as a result ofthe deemed disposal on entry into the UK-REIT regime is disregarded incalculating the gain or loss on the disposal. However, there is no repayment ofthe entry charge in these circumstances. It is important to note that the Company cannot guarantee continued compliancewith all of the UK-REIT conditions and that the UK-REIT regime may cease toapply in some circumstances. HMRC may require the Group to exit the UK-REITregime if: • it regards a breach of the conditions or failure to satisfy the conditions relating to the Tax-Exempt Business, or an attempt to avoid tax, as sufficiently serious; • if the Company has committed a certain number of minor or inadvertent breaches in a specified period; or • if HMRC has given the Company at least two notices in relation to the avoidance of tax within a ten year period. In addition, if the conditions for UK-REIT status relating to the share capitalof the Company and the prohibition on entering into loans with abnormal returnsare breached or the Company ceases to be UK resident, becomes dual resident oran open ended investment company, the Group will automatically lose UK-REITstatus (for further details regarding these conditions, see Part II). Shareholders should note that it is possible that the Company could lose itsstatus as a REIT as a result of actions by third parties, for example, in theevent of a successful takeover by a company that is not a REIT or due to abreach of the close company condition if it is unable to remedy the breachwithin a specified timeframe. Where the Group is required to leave the UK-REIT regime within ten years ofjoining, HMRC has wide powers to direct how it is to be taxed, including inrelation to the date on which the Group is treated as exiting the UK-REITregime. 5. Extraordinary General Meeting Set out on pages 31 to 39 of this document is the notice convening anExtraordinary General Meeting to be held at The Board Room, Ground Floor, RyderCourt, 14 Ryder Street, London SW1Y 6QB at 11 a.m. on 18 December 2006. At thisEGM a special resolution will be proposed to approve the proposed amendments tothe Articles of Association. 6. Actions to be taken A Form of Proxy for use by members, who alone are entitled to attend and vote atthe Extraordinary General Meeting, is enclosed. You are requested to completethe Form of Proxy in accordance with the instructions thereon and return it sothat it is received by the Company's Registrars, Capita Registrars, not laterthan 11 a.m. on 16 December 2006, being 48 hours before the time appointed forholding the Extraordinary General Meeting. If you complete and return the Formof Proxy, you can still attend and vote at the Extraordinary General Meeting inperson, if you wish. 7. Recommendation For the reasons stated above, the Board believes the conversion of the Companyinto a UK-REIT to be in the best interests of the shareholders as a whole.Accordingly, it expects to elect to become a UK-REIT with effect from 1 January2007, subject to the approval of the shareholders to the proposed amendments tothe Articles of Association and review of any HMRC guidance available. TheDirectors wish to facilitate such process by making the amendments to theArticles of Association described in this document which will only come intoforce if the Company becomes a UK-REIT. The Board considers that the special resolution to be proposed at theExtraordinary General Meeting, is in the best interests of the shareholders as awhole and recommends you vote in favour of it. Directors who hold OrdinaryShares in the Company intend to vote in favour of this resolution in respect oftheir own beneficial holdings of 65,195 Ordinary Shares in aggregate,representing approximately 0.27% of the issued Ordinary Shares (as at 17November 2006) being the last business day before the date of this document. Yours sincerely,Graeme A ElliotChairman PART II THE UK-REIT REGIME TC "PART II - THE UK-REIT REGIME" /l 9 /* MERGEFORMAT The UK-REIT regime The following paragraphs are intended as a general guide only and constitute ahigh-level summary of the Company's understanding of current UK law and HMRCpractice, each of which are subject to change, possibly with retrospectiveeffect. They are not advice. As at the date of this document, the guidance to bepublished by HMRC has not yet been finalised (although it has been published indraft form) and are therefore subject to change. Changes in the draft guidanceas made compared to the drafts currently available could change the positiondescribed below. Overview The UK-REIT regime introduced in the Finance Act 2006 is intended to encouragegreater investment in the UK property market and follows similar legislation inother European countries, as well as the long-established regimes in the UnitedStates, Australia and the Netherlands. Currently, investing in property through a corporate investment vehicle (such asthe Company) has the disadvantage that, in comparison to a direct investment inproperty assets, some categories of shareholders (but not UK companies)effectively suffer tax twice on the same income - first, indirectly, whenmembers of the Group pay UK direct tax on their profits, and secondly, directly(but with the benefit of a tax credit) when the shareholder receives a dividend.Non-tax paying entities, such as UK pension funds, suffer tax indirectly wheninvesting through a corporate vehicle that is not a UK-REIT in a manner they donot suffer if they were to invest directly in the property assets. As a UK-REIT,UK resident companies within the Group and non-UK resident companies within theGroup with a UK qualifying property rental business would no longer pay UKdirect taxes on their income and capital gains from the Tax-Exempt Business,provided that certain conditions are satisfied. Instead, distributions inrespect of the Tax-Exempt Business will be treated for UK tax purposes asproperty income in the hands of shareholders (Part III of this document containsfurther detail on the UK tax treatment of shareholders after entry into theUK-REIT regime). However, corporation tax and overseas taxation will still bepayable in the normal way in respect of income and gains from the Group'sbusiness (generally including any property trading business, overseas propertyrental business and certain other non property activities and investments) notincluded in the Tax-Exempt Business (the "Residual Business"). While within the UK-REIT regime, the Tax-Exempt Business will be treated as aseparate business for corporation tax purposes to the Residual Business and aloss incurred by the Tax-Exempt Business cannot be set off against profits ofthe Residual Business (and vice versa). As a UK-REIT, the Company will be required to distribute to shareholders (by wayof dividend) on or before the filing date for the UK-REIT's tax return for theaccounting period in question at least 90% of the income profits (broadly,calculated using normal tax rules) of the UK-resident members of the Group inrespect of the Tax-Exempt Business and of the non-UK resident members of theGroup as they derive from their UK qualifying property rental business arisingin each accounting period. Failure to meet this requirement will result in a taxcharge calculated by reference to the extent of the failure, although thischarge can be avoided if an additional dividend is paid within a specifiedperiod which brings the amount of profits distributed up to the required level. In this document, references to a company's accounting period are to itsaccounting period for tax purposes. This period can differ from a company'saccounting period for other purposes. The treatment of a dividend paid by the Company in the first year after itbecomes a UK-REIT should depend on whether it is paid out of profits thatexisted before or after the Group became a UK-REIT. For example, if the Companyconverts into a UK-REIT on 1 January 2007 and has before that date announced anintention to pay an interim dividend for payment after that date, that dividendwould be paid entirely out of profits earned before the Group became a UK-REITand should therefore be a Non-PID dividend. A dividend later in 2007 may be paidpartly out of profits earned prior to the Group becoming a UK-REIT and partlyout of profits earned subsequently and would therefore comprise partly a PID andpartly a Non-PID dividend. The Company will provide shareholders with acertificate setting out how much of their dividend is a PID and how much is aNon-PID dividend. Subject to certain exceptions, PIDs will be subject to withholding tax at thebasic rate of income tax (currently 22%). As referred to above, further detailsof the UK tax treatment of shareholders after entry into the UK-REIT regime arecontained in Part III of this document. Qualification as a UK-REIT The Group will become a UK-REIT by the Company (as the principal company of theGroup) serving notice on HMRC before the beginning of the first accountingperiod during which it wishes the Group to become a UK-REIT. In order to qualifyas a UK-REIT, the Group must satisfy certain conditions set out in the FinanceAct 2006. A non-exhaustive summary of the material conditions is set out below.Broadly, the Company must satisfy the conditions set out in paragraphs (A), (B),(C) and (D) below and the Group companies must satisfy the conditions set out inparagraph (E). (A) Company conditions The Company must be a solely UK-resident company (other than an open-endedinvestment company) whose ordinary shares are listed on a recognised stockexchange, such as the London Stock Exchange. The Company must also not (apartfrom in one exceptional circumstance) be a "close company" (as defined insection 414 of the Income and Corporation Taxes Act 1988) - as amended bysection 106(6) of the Finance Act 2006 (the "close company condition"). Insummary, the close company condition amounts to a requirement that not less than35% of the UK-REIT's shares are beneficially held by the public and for thispurpose the "public" excludes directors or the UK-REIT and certain of theirassociates, and shareholders who, alone or together with certain associates,control more than 5% of the UK-REIT's share capital. (B) Share capital restrictions The Company must have only one class of ordinary share in issue and the onlyother shares it may issue are non-voting fixed rate preference shares. (C) Interest restrictions The Company must not be party to any loan in respect of which the lender isentitled to interest which exceeds a reasonable commercial return on theconsideration lent or where the interest depends to any extent on the results ofany of its business or on the value of any of its assets. In addition, theamount repayable must either not exceed the amount lent or must be reasonablycomparable with the amount generally repayable (in respect of an equal amount ofconsideration) under the terms of issue of securities listed on a recognisedstock exchange. (D) Financial Statements The Company must prepare financial statements in accordance with statutoryrequirements ("Financial Statements") and submit these to HMRC. The financialstatements must contain the information about the Tax Exempt Business and theResidual Business separately. The UK-REIT regime specifies the information to beincluded and the basis of the preparation of their financial statements. (E) Conditions for the Tax Exempt Business The Tax Exempt Business must satisfy the conditions summarised below in respectof each accounting period during which it is to be treated as a UK-REIT: I. the Tax Exempt Business must throughout the accountingperiod involve at least three properties; II. throughout the accounting period no one property mayrepresent more than 40% of the total value of the properties involved in the TaxExempt Business. Assets must be valued at fair value and in accordance withInternational Accounting Standards ("IAS") and at fair value when the IAS offersa choice between a cost basis and a fair value basis; III. treating all members of the Group as a single company, theTax Exempt Business must not include any property which is classified asowner-occupied in accordance with generally accepted accounting practice; and IV. at least 90% of the amounts shown in the Financial Statementsof the Group companies as income profits (broadly calculated using the normaltax rules) of the UK resident members of the Group arising in respect of the TaxExempt Business in the accounting period, and the income profits of the non-UKresident members of the Group insofar as they arise in respect of such members'UK qualifying property rental business in the accounting period, must bedistributed by the Company in the form of a dividend (a PID) on or before thefiling date for the Company's tax return for the accounting period (the "90%distribution test"). For the purpose of satisfying the 90% distribution test,any dividend withheld in order to comply with the 10% rule will be treated ashaving been paid; V. the profits arising from the qualifying property rentalbusiness must represent at least 75% of the Group's total profits for theaccounting period (the "75% profits test"). Profits for this purpose meansprofits before deduction of tax and excludes realised and unrealised gains andlosses on the disposal of property, calculated in accordance with IAS; and VI. at the beginning of the accounting period the value of theassets in the qualifying property rental business must represent at least 75% ofthe total value of assets held by the Group (the "75% assets test"). Assets mustbe valued in accordance with IAS and at fair value where IAS offers a choice ofvaluation between cost basis and fair value and in applying this test no accountis to be taken of liabilities secured against or otherwise relating to assets(whether generally or specifically). Effect of becoming a UK-REIT (A) Entry charge Each UK resident member of the Group that carried on a qualifying propertyrental business in the UK or overseas and any non-UK resident member of theGroup that carries on a qualifying property rental business in the UK will beliable to pay an entry charge broadly equal to 2% of the aggregate market valueof the properties and other assets involved in that business. This can be paid at the same time as corporation tax is payable in respect ofthe first accounting period following entry into the UK-REIT regime, or ininstalments over a four year period. If the instalment option is taken, as the Board intends to do, the actual amountpayable will be paid in the following percentages with the first instalmentpayable as above and the remaining instalments on the anniversary of that date: First instalment 0.50%Second instalment 0.53%Third instalment 0.56%Fourth instalment 0.60% There is no equivalent entry charge if a member of the Group buys a propertyfollowing entering into the UK-REIT regime. However, if the Group were toacquire a company that is not a UK-REIT, a 2% entry charge will apply in respectof the property owned by the acquired company. See also paragraph (K)(Acquisitions and Takeovers below). (B) Tax savings As a UK-REIT, the Group will not pay UK-direct tax on profits and gains from theTax Exempt Business. Corporation tax will still apply in the normal way inrespect of the Residual Business which includes certain trading activities,incidental letting in relation to property trades, intra-group letting ofproperty, letting of administrative property which is temporarily surplus torequirements and certain income such as dividends and interest from members ofthe Group carrying on non-UK activities. Corporation tax could also be payablewere a member of the Group (as opposed to property involved in the UK qualifyingproperty rental business) to be sold. The Group would also continue to payindirect taxes such as VAT, stamp duty, land tax and stamp duty and payrolltaxes (such as national insurance) in the normal way. (C) Attribution of Dividends Distributions by the Company will be attributed in the following order: I. In satisfaction of the obligation to distribute 90% of the profits of the Tax Exempt Business, calculated under tax principles and excluding chargeable gains, which arise in the accounting period - paid, under deduction of income tax at 22%, where appropriate as a PID. II. At the discretion of the Company, a distribution of all or any of the following: - profits earned by the Residual (taxable) Business in the period; - reserves of the Residual Business including brought forward reserves;, - profits representing the difference between the accounting distributable profits and profits calculated for tax purposes of the Tax Exempt Business (the difference principally results from the effect of claiming notional capital allowances in calculating the profits of the Tax Exempt Business). This distribution is treated as a normal dividend (to which a tax credit may beattached) and no tax is withheld by the Company. III. Distribution of the remaining 10% of the Tax Exempt Business income (calculated under tax principles and excluding chargeable gains) paid - under deduction of basic rate income tax at 22%, where appropriate as a PID. IV. Distribution of gains relating to the Tax Exempt Business - paid under deduction of 22% basic rate income tax, where appropriated as a PID. V. Distribution of any other amount - treated as a normal dividend (to which a tax credit may be attached) and no tax is withheld by the Company. (D) Financial statements As mentioned above, a UK-REIT will be required to submit Financial Statements toHMRC. (E) Interest cover ratio A tax charge will arise if, in respect of any accounting period, the ratio ofthe income profits (before capital allowances) of the UK resident members of theGroup plus the UK income profits of any non-UK resident member of the Group, ineach case, in respect of its Tax Exempt Business plus the financing costsincurred in respect of the Tax Exempt Business financing costs incurred inrespect of the Tax Exempt Business, excluding certain intra-group financingcosts, is less than 1.25. This ratio is calculated by reference to the FinancialStatements, apportioning costs relating partly to the Tax Exempt Business andpartly to the Residual Business reasonably. The amount (if any) by which thefinancing costs exceeds the amount of those costs which would cause that ratioto equal 1.25 is chargeable to corporation tax. (F) Property development and property trading by a UK-REIT A property development by a UK resident member of the Group can be within theTax-Exempt Business provided certain conditions are met. However, if the costsof the development exceed 30% of the fair value of the asset at the later of (a)the date on which the Company becomes a UK-REIT, and (b) the date of theacquisition of the development property, and the UK-REIT sells the developmentproperty within three years of completion, the property will be treated as neverhaving been within the Tax-Exempt Business. If a UK resident member of the Groupdisposes of a property (whether or not a development property) in the course ofa trade, the property will be treated as never having been within the Tax-ExemptBusiness. (G) Certain tax avoidance arrangements If HMRC believes that a member of the Group has been involved in certain taxavoidance arrangements, it may cancel the tax advantage obtained and, inaddition, impose a tax charge equal to the amount of the tax advantage. Theserules apply to both the Residual Business and the Tax-Exempt Business. (H) Movement of assets in and out of the Tax Exempt Business In general, where an asset owned by a UK-resident member of the Group and usedfor the Tax Exempt Business begins to be used for the Residual Business, therewill be a capital gain tax-free step up in the base cost of the property. Wherean asset owned by a UK-resident member of the Group and used for the ResidualBusiness begins to be used for the Tax Exempt Business, this will generallyconstitute a taxable market value disposal of the asset, except for capitalallowances purposes. Special rules apply to disposals by way of a trade and todevelopment property. (I) Funds awaiting reinvestment Where an asset used exclusively in the Tax Exempt Business is sold, thelegislation provides for the sale proceeds to be treated as assets of the TaxExempt Business for the purposes of the 75% profits test and the 75% assets testfor two years following the disposal, provided that they are held as cash orcash equivalents. However, any interest earned on that cash is treated as partof the Residual Business and therefore taxable. (J) Joint ventures If one or more members of the Group are beneficially entitled, in the aggregate,to at least 40% of the profits available for distribution to equity holders in ajoint venture company and at least 40% of the assets of the joint venturecompany available to equity holders in the event of a winding-up, that jointventure company is carrying on a qualifying property rental business whichsatisfies the 75% profits test and the 75% assets test (the "JV company") andcertain other conditions are satisfied, the Company and the JV Company, may bygiving notice to HMRC elect for the assets and income of the JV company to beincluded in the Tax-Exempt Business for tax purposes. In such circumstances, theincome and assets of the JV company will count towards the 90% distributiontest, the 75% profits test and the 75% assets test to the extent of the Group'sinterest in the JV company. As at the date of this document, the regulation in relation to joint venturesand UK-REITs does not specifically apply to any subsidiaries of a JV company,although it is currently expected that guidance or other further information toclarify the position will be provided by HMRC. (K) Acquisitions and Takeovers If a member of the Group acquires another UK-REIT, no entry charge will bepayable. However, if a company which is not a UK-REIT joins the Group, the entrycharge will be payable on the value of the properties owned by the qualifyingproperty rental business of the target company. If a UK-REIT is taken over by another UK-REIT, the acquired UK-REIT does notnecessarily cease to be a UK-REIT and will, provided the auditions are met,continue to enjoy Tax-Exemptions in respect of the profits of its Tax-ExemptBusiness and capital gains on disposal of properties in the Tax-Exempt Business.There is no entry charge as a result of the acquired UK-REIT joining theacquiror's group and the properties of the acquired UK-REIT are not treated ashaving been sold and reacquired at market value. The position is different where a UK-REIT is taken over by an acquiror which isnot a UK-REIT. In these circumstances, the acquired UK-REIT is likely in mostcases to fail to meet the requirements for being a UK-REIT and will therefore betreated as leaving the UK-REIT regime at the end of its accounting periodpreceding the takeover and ceasing from the end of this accounting period tobenefit from Tax-Exemptions on the profits of its Tax-Exempt Business andcapital gains on disposal of property forming part of its Tax-Exempt Business.The properties in the Tax-Exempt Business are treated as having been sold andreacquired at market value for the purposes of corporation tax on chargeablegains immediately before the end of the preceding accounting period. Thesedisposals should be tax free as they are deemed to have been made at a time whenthe Company was still in the UK-REIT regime and future capital gains on therelevant assets will therefore be calculated by reference to a base costequivalent to this market value. If the Company ends its accounting periodimmediately prior to the takeover becoming unconditional in all respects,dividends paid as PIDs before that date should not be recharacterisedretrospectively as normal dividends. PART III UNITED KINGDOM TAX TREATMENT OF SHAREHOLDERS AFTER ENTRY INTO THE UK-REIT REGIME TC "PART III - UNITED KINGDOM TAX TREATMENT OFSHAREHOLDERS AFTER ENTRY INTO THE UK-REIT REGIME" /l 9 /* MERGEFORMAT INTRODUCTION The following paragraphs are intended as a general guide only and are based onthe Company's understanding of current UK tax law and HMRC practice, each ofwhich is subject to change, possibly with retrospective effect. They are notadvice. As at the date of this document, the detailed guidance to be provided by HMRChas not yet been finalised (although it has been published in draft form) andare therefore subject to change. Changes in the guidance as made compared to thedraft currently available could change the position described below The following paragraphs relate only to certain limited aspects of the UnitedKingdom taxation treatment of PIDs and Non-PID Dividends paid by the Company,and to disposals of shares in the Company, in each case, after the Company haselected into the UK-REIT regime. Except where otherwise indicated, they apply only to shareholders who are bothresident and ordinarily resident for tax purposes solely in the United Kingdom.They apply only to shareholders who are the absolute beneficial owners of boththeir PIDs and their shares in the Company and who hold their shares asinvestments. They do not apply to Substantial Shareholders. They do not apply tocertain categories of shareholders, such as dealers in securities ordistributions, persons who have or are deemed to have acquired their shares byreason of their or another's employment, persons who hold their shares as partof hedging or conversion transactions, or persons who hold shares in connectionwith a UK branch, agency or permanent establishment. Except where otherwise indicated at B(iv) (Withholding tax) below, they do notapply to persons holding shares in the company by virtue of an interest in anypartnership, insurance companies, life insurance companies, mutual companies,collective investment schemes, charities, trustees, local authorities, orpension scheme administrators. Shareholders who are in any doubt about their tax position, or who are subjectto tax in a jurisdiction other than the United Kingdom, should consult their ownappropriate independent professional adviser without delay, particularlyconcerning their tax liabilities on PIDs, whether they are entitled to claim anyrepayment of tax, and, if so, the procedure for doing so. A. UK TAXATION OF NON-PID DIVIDENDS Non-PID Dividends paid by the Company will be taxed in the same way as dividendspaid by the Company prior to entry into the UK-REIT regime, whether in the handsof individual or corporate shareholders and regardless of whether theshareholder is resident for tax purposes in the UK. B. UK TAXATION OF PIDS i. UK taxation of shareholders who are UK resident individuals Subject to certain exceptions, a PID will generally be treated in the hands ofshareholders who are individuals as the profit of a single UK property business(as defined in section 264 of the Income Tax (Trading and Other Income) Act2005). A PID is, together with any property income distribution from any othercompany to which Part 4 of the Finance Act 2006 applies, treated as a separateUK property business from any other UK property business (a "different UKproperty business") carried on by the relevant shareholder. This means thatsurplus expenses from a shareholder's different UK property business cannot beoff-set against a PID as part of a single calculation of the profits of theshareholder's UK property business. Please see also section B(iv) (Withholding tax), below. ii. UK taxation of UK resident corporate shareholders Subject to certain exceptions, a PID will generally be treated in the hands ofshareholders who are within the charge to corporation tax as profits of aSchedule A business (as defined in section 15 of the Income and CorporationTaxes Act 1988). This means that, subject to the availability of any exemptionsor reliefs, such shareholders should be liable to corporation tax on income onthe entire amount of their PID. A PID is, together with any property incomedistribution from any other company to which Part 4 of the Finance Act 2006applies, treated as a separate Schedule A business from any other Schedule Abusiness (a "different Schedule A business") carried on by the relevantshareholder. This means that any surplus expenses from a shareholder's differentSchedule A business cannot be off-set against a PID as part of a singlecalculation of the shareholder's Schedule A profits. Please see also section B(iv) (Withholding tax), below. iii. UK taxation of all shareholders who are not resident for taxpurposes in the UK Where a shareholder who is resident outside the UK receives a PID, the PID willgenerally be chargeable to UK income tax as profit of a UK property business andthis tax will generally be collected by way of a withholding. Please see also section B(iv) (Withholding tax), below. iv. Withholding tax (a) General Subject to certain exceptions summarised at paragraph (d) below, the Company isrequired to withhold income tax at source at the basic rate (currently 22%) fromits PIDs. The Company will provide shareholders with a certificate setting outthe amount of tax withheld. (b) Shareholders solely resident and ordinarily resident in the UK Where income tax has been withheld at source, shareholders who are individualsmay, depending on their individual circumstances, either be liable to furthertax on their PID at their applicable marginal rate, or be entitled to claimrepayment of some or all of the tax withheld on their PID. Shareholders who arecorporates may, depending on their individual circumstances, be liable to paycorporation tax on their PID but they should note that, where income tax iswithheld at source, the tax withheld can be set against the shareholder'sliability to corporation tax in the accounting period in which the PID isreceived. (c) Shareholders who are not resident for tax purposes in the UK It is not possible for a shareholder to make a claim under a double taxationtreaty for a PID to be paid by the Company gross or at a reduced rate. The rightof a shareholder to claim repayment of any part of the tax withheld from a PIDwill depend on the existence and terms of any double tax convention between theUK and the country in which the shareholder is resident. (d) Exceptions to requirement to withhold income tax Shareholders should note that in certain circumstances the Company may notwithhold income tax at source from a PID. These include where the Companyreasonably believes that the person beneficially entitled to the PID is: acompany resident for tax purposes in the UK and where the person beneficiallyentitled to a PID is a charity, a body mentioned in section 507(1) ICTA which isallowed the same exemption from tax as charities, the scheme administrator of aregistered pension scheme, or the sub-scheme administrator of a pensionsub-scheme or a person entitled to receive the income of a fund entitled toexemption under section 614(3) ICTA. Payments made to the manager of an individual savings account or a personalequity plan may also be made gross. The Company will also not be required to withhold income tax at source from aPID where the Company reasonably believes that the body beneficially entitled tothe PID is a partnership each member of which is either a body described in theparagraph above or the European Investment Fund. In order to pay a PID without withholding tax, the Company will need to besatisfied that the shareholder concerned is entitled to that treatment. Forthat purpose, the Company will require such shareholders to submit a valid claimform (copies of which may be obtained on request) from the Company's Registrars,Capita Registrars. A summary in tabular form of the UK tax position of distributions made by theCompany for certain groups of shareholders is shown below. 1. UK Resident Individual PID Dividend • Tax withheld at 22%. • No tax withheld by UK-REIT. • Taxed at his/her marginal rate. • Treated as dividend income grossed up by 100/90 to include in the individual's income tax• Credit is given for the tax withheld by the calculation. UK-REIT. Therefore, to the extent that the individual is a lower or higher rate tax payer, • Taxed as top slice of income. a repayment or further tax may be due. • Notional tax credit of 10% is available. Therefore, only if the individual is a higher rate tax payer will further tax be due. 2. UK Resident Company PID Dividend • No tax withheld by UK-REIT. • No tax withheld by UK-REIT. • Subject to Corporation Tax at 30%. • Treated as a normal dividend -exempt from tax. 3. Non UK Resident Company PID Dividend • Tax withheld by UK-REIT on the distribution • No tax withheld by UK-REIT. • May reclaim the difference between 22% withholding • Not subject to UK tax. and the relevant dividend withholding tax rate agreed under the relevant double tax treaty (if applicable) (typically to 15%). • No further UK tax. 4. UK Tax Exempt shareholder PID Dividend • No tax withheld by UK-REIT. • No tax withheld by UK-REIT. • Not taxable in the hands of the shareholder. • No UK tax. C. UK TAXATION OF CHARGEABLE GAINS, STAMP DUTY AND STAMP DUTY RESERVE TAXIN RESPECT OF SHARES IN THE COMPANY Subject to the paragraph headed "Introduction", above, the following commentsapply to both individual and corporate shareholders, regardless of whether suchshareholders are resident for tax purposes in the UK. i. UK taxation of chargeable gains Chargeable gains arising on the disposal of shares in the Company followingentry into the UK-REIT regime should be taxed in the same way as chargeablegains arising on the disposal of shares in the Company prior to entry into theUK-REIT regime. The entry of the Group into the UK-REIT regime will notconstitute a disposal of shares in the Company by shareholders for UK chargeablegains purposes. ii. UK stamp duty and UK stamp duty reserve tax ("SDRT") A conveyance or transfer on sale or other disposal of shares in the Companyfollowing entry into the UK-REIT regime will be subject to UK stamp duty or UKSDRT in the same way as it would have been prior to entry into the UK-REITregime. PART iV FURTHER INFORMATION ON THE PROPOSED AMENDMENTS TO THE ARTICLES TC "PART IV - FURTHER INFORMATION ON THE PROPOSED AMENDMENTS TO THE ARTICLES" /l 9 /* MERGEFORMAT As explained in the letter from the Chairman, it is proposed that the Articlesof Association should be amended in order to enable the Company to demonstrateto HMRC that it has taken reasonable steps to avoid paying a dividend (or makingany other distribution) to a Substantial Shareholder. For these purposes "Company" includes any body corporate and certain entitieswhich are deemed to be bodies corporate for the purposes of overseasjurisdictions with which the UK has a double taxation agreement or for thepurposes of such double tax agreements. If a distribution is paid to a Substantial Shareholder and the Company has nottaken reasonable steps to avoid doing so, the Company would become subject to atax charge. The proposed amendments to the Articles will include the insertion of a newArticle (the "new Article"). The text of the new Article is set out in thenotice convening the EGM that is set out at the end of this circular. The new Article: (A) provides directors with powers to identify Substantial Shareholders; (B) prohibits the payment of dividends on shares that form part of aSubstantial Shareholding, unless certain conditions are met; (C) allows dividends to be paid on shares that form part of a SubstantialShareholding where the shareholder has disposed of its rights to dividends onits shares; and (D) seeks to ensure that if a dividend is paid on shares that form part ofa Substantial Shareholding and arrangements of the kind referred to in (C) arenot met, the Substantial Shareholder concerned does not become beneficiallyentitled to that dividend. References in this Part to dividends include any other distributions. The effect of the new Article is explained in more detail below: (A) Identification of Substantial Shareholders The share register of the Company records the legal owner and the number ofshares they own in the Company but does not identify the persons who arebeneficial owners of the shares or are entitled to control the voting rightsattached to the shares or are beneficially entitled to dividends. While therequirements for the notification of interests in shares provided in Part VI ofthe Companies Act 1985 (the "Act") and the Board's rights to require disclosureof such interests (pursuant to Section 212 of the Act and Article 9 of theArticles) should assist in the identification of Substantial Shareholders, ifthose provisions are not on their own sufficient. Accordingly, the new Article would require a Substantial Shareholder and anyregistered shareholder holding shares on behalf of a Substantial Shareholder tonotify the Company if his shares form part of a Substantial Shareholding. Such anotice must be given within two business days. If a person is a SubstantialShareholder at the date the new Article is adopted, that Substantial Shareholder(and any registered shareholder holding shares on its behalf) must give such anotice within two business days after the date the new Article is adopted. Thenew Article gives the Board the right to require any person to provideinformation in relation to any shares in order to determine whether the sharesform part of a Substantial Shareholding. If the required information is notprovided within the time specified (which would be seven days after a request ismade or such other period as the Board may decide), the Board would be entitledto impose sanctions, including withholding dividends (as described in paragraph(B) below) and/or requiring the transfer of the shares to another person who isnot, and does not thereby become, a Substantial Shareholder (as described inparagraph (E) below). (B) Preventing payment of a dividend to a Substantial Shareholder The new Article provides that a dividend will not be paid on any shares that theBoard believes may form part of a Substantial Shareholding unless the Board issatisfied that the Substantial Shareholder is not beneficially entitled to thedividend. If in these circumstances payment of a dividend is withheld, the dividend willbe paid subsequently if the Board is satisfied that: • the Substantial Shareholder concerned is not beneficially entitled to the dividends (see also (C) below); • the shareholding is not part of a Substantial Shareholding; • all or some of the shares and the right to the dividend have been transferred to a person who is not, and does not thereby become, a Substantial Shareholder (in which case the dividends would be paid to the transferee); or • sufficient shares have been transferred (together with the right to the dividends) such that the shares retained are no longer part of a Substantial Shareholding (in which case the dividends would be paid on the retained shares). For this purpose references to the "transfer" of a share include the disposal(by any means) of beneficial ownership of, control of voting rights in respectof and beneficial entitlement to dividends in respect of, that share. (C) Payment of a dividend where rights to it have been transferred The new Article provides that dividends may be paid on shares that form part ofa Substantial Shareholding if the Board is satisfied that the right to thedividend has been transferred to a person who is not, and does not therebybecome, a Substantial Shareholder and the Board may be satisfied that the rightto the dividend has been transferred if it receives a certificate containingappropriate confirmations and assurances from the Substantial Shareholder. Sucha certificate may apply to a particular dividend or to all future dividends inrespect of shares forming part of a specified Substantial Shareholding, untilnotice rescinding the certificate is received by the Company. A certificatethat deals with future dividends will include undertakings by the personproviding the certificate: (a) to ensure that the entitlement to future dividends will be disposedof; and (b) to inform the Company immediately of any circumstances which wouldrender the certificate no longer accurate. The Directors may require that any such certificate is copied or provided tosuch persons as they may determine, including HMRC. If the Board believes a certificate given in these circumstances is or hasbecome inaccurate, then it will be able to withhold payment of future dividends(as described in paragraph (B) above). In addition, the Board may require aSubstantial Shareholder to pay to the Company the amount of any tax payable (andother costs incurred) as a result of a dividend having been paid to aSubstantial Shareholder in reliance on the inaccurate certificate (as describedin paragraph (E) below). The Board may require a sale of the relevant shares andretain the amount claimed from the proceeds. Certificates provided in the circumstances described above will be ofconsiderable importance to the Company in determining whether dividends can bepaid. If the Company suffers loss as a result of any misrepresentation or breachof undertaking given in such a certificate, it may seek to recover damagesdirectly from the person who has provided it. Any such tax may also be recoveredout of dividends to which the Substantial Shareholder concerned may becomeentitled in the future. The effect of these provisions is that there is no restriction on a personbecoming or remaining a Substantial Shareholder provided that the person whodoes so makes appropriate arrangements to divest itself of the entitlement todividends. (D) Trust arrangements where rights to dividends have not been disposed ofby Substantial Shareholder The new Article provides that if a dividend is in fact paid on shares formingpart of a Substantial Shareholding (which might occur, for example, if aSubstantial Shareholding is split among a number of nominees and is not notifiedto the Company prior to a dividend payment date) the dividends so paid are to beheld on trust by the recipient for any person (who is not a SubstantialShareholder) nominated by the Substantial Shareholder concerned. The personnominated as the beneficiary could be the purchaser of the shares if theSubstantial Shareholder is in the process of selling down their holding so asnot to cause the Company to breach the Substantial Shareholder rule. If theSubstantial Shareholder does not nominate anyone within 12 years, the dividendconcerned will be held on trust for the Company. If the recipient of the dividend passes it on to another without being awarethat the shares in respect of which the dividend was paid were part of aSubstantial Shareholding, the recipient will have no liability as a result.However, the Substantial Shareholder who receives the dividend should do sosubject to the terms of the trust and as a result may not claim to bebeneficially entitled to those dividends. (E) Mandatory sale of Substantial Shareholdings The new Article also allows the Board to require the disposal of shares formingpart of a Substantial Shareholding if: • if a Substantial Shareholder has been identified and a dividend has been announced or declared and the Board has not been satisfied that the Substantial Shareholder has transferred the right to the dividend (or otherwise is not beneficially entitled to it); • there has been a failure to provide information requested by the Board; or • any information provided by any person proves materially inaccurate or misleading. In these circumstances, if the Company incurs a charge to tax as a result of oneof these events, the Board may, instead of requiring the shareholder to disposeof the shares, arrange for the sale of the relevant shares and for the Companyto retain from the sale proceeds an amount equal to any tax so payable. The new Article has been discussed with HMRC which has confirmed that theyconstitute "reasonable steps" to avoid paying a dividend to a SubstantialShareholder for the purposes of the legislation. (F) Takeovers The new Article does not prevent a person from acquiring control of the Companythrough a takeover or otherwise, although as explained above, such an event maycause the Group to cease to qualify as a REIT. (G) Other The new Article also gives the Company power to require any shareholder whoapplies to be paid dividends without any tax withheld to provide suchcertificate as the Board may require to establish the shareholder's entitlementto that treatment. PART V PRIMARY HEALTH PROPERTIES PLC Notice of Extraordinary General Meeting TC "PART V NOTICE OF EXTRAORDINARY GENERAL MEETING" /l 9 /* MERGEFORMAT Notice is hereby given that an Extraordinary General Meeting of Primary HealthProperties PLC (the "Company") will be held in The Board Room, Ground Floor,Ryder Court, Ryder Street London SW1Y 6QB, on 18 December 2006 at 11 a.m. toconsider and, if thought fit, to pass the following resolution as a SpecialResolution: SPECIAL RESOLUTION THAT, with effect from (and including) the first day of the calendar yearfollowing the date of this resolution in respect of which the Company has givena valid notice under section 109 of the Finance Act 2006, the Articles ofAssociation be and they are hereby amended by the insertion of the following asnew Articles 161 to 167: 161 Real Estate Investment Trust Cardinal principle 161.1 It is a cardinal principle that, for so long as the Company is theprincipal company in a real estate investment trust ("REIT") for the purposes ofPart 4 of the Finance Act 2006, as such Part may be modified, supplemented orreplaced from time to time, no member of the Group should be liable to pay taxunder Regulation 10 of the Real Estate Investment Trusts (Breach of Conditions)Regulations 2006 (as such regulations may be modified, supplemented or replacedfrom time to time) on or in connection with the making of a Distribution. 161 .2 This Article supports such cardinal principle by, among other things,imposing restrictions and obligations on the shareholders of the Company and,indirectly, certain other Persons who may have an interest in the Company, andshall be construed accordingly so as to give effect to such cardinal principle. 162 Definitions and interpretation 162.1 For the purposes of this Article, the following words and expressionsshall bear the following meanings: • "business day" means a day (not being a Saturday or Sunday)on which banks are normally open for business in London; • "Distribution" means any dividend or other distribution onor in respect of the shares of the Company and references to a Distributionbeing paid include a distribution not involving a cash payment being made; • "Distribution Transfer" means a disposal or transfer(however effected) by a Person of his rights to a Distribution from the Companysuch that he is not beneficially entitled (directly or indirectly) to such aDistribution and no Person who is so entitled subsequent to such disposal ortransfer (whether the immediate transferee or not) is (whether as a result ofthe transfer or not) a Substantial Shareholder; • "Distribution Transfer Certificate" means a certificate insuch form as the Directors may specify from time to time to the effect that therelevant Person has made a Distribution Transfer, which certificate may berequired by the Directors to satisfy them that a Substantial Shareholder is notbeneficially entitled (directly or indirectly) to a Distribution; • "Excess Charge" means, in relation to a Distribution whichis paid or payable to a Person, all tax or other amounts which the Directorsconsider may become payable by the Company or any other member of the Groupunder Regulation 10 of the Real Estate Investment Trusts (Breach of Conditions)Regulations 2006 (as such regulation may be modified, supplemented or replacedfrom time to time) and any interest, penalties, fines or surcharge attributableto such tax as a result of such Distribution being paid to or in respect of thatPerson; • "Group" means the Company and the other companies in itsgroup for the purposes of section 134 of the Finance Act 2006 (as such sectionmay be modified, supplemented or replaced from time to time); • "HMRC" means HM Revenue & Customs; • "interest in the Company" includes, without limitation, aninterest in a Distribution made or to be made by the Company; • "Person" includes a body of Persons, corporate orunincorporated, wherever domiciled; • "Relevant Registered Shareholder" means a shareholder whoholds all or some of the shares in the Company that comprise a SubstantialShareholding (whether or not a Substantial Shareholder); • "Reporting Obligation" means any obligation from time totime of the Company to provide information or reports to HMRC as a result of orin connection with the Company's status as a REIT; • "Substantial Shareholding" means the shares in the Companyin relation to which or by virtue of which (in whole or in part) a Person is aSubstantial Shareholder; • "Substantial Shareholder" means any person whose interestin the Company, whether legal or beneficial, direct or indirect, may cause anymember of the Group to be liable to pay tax under Regulation 10 of the RealEstate Investment Trusts (Breach of Conditions) Regulations 2006 (as suchregulations may be modified, supplemented or replaced from time to time) on orin connection with the making of a Distribution to or in respect of such Personincluding, at the date of adoption of this Article, any holder of excessiverights as defined in the Real Estate Investment Trusts (Breach of Conditions)Regulations 2006; 162.2 Where under this Article any certificate or declaration may be or isrequired to be provided by any Person (including, without limitation, aDistribution Transfer Certificate), such certificate or declaration may berequired by the Directors (without limitation): • to be addressed to the Company, the Directors or such otherPersons as the Directors may determine (including HMRC); • to include such information as the Directors consider isrequired for the Company to comply with any Reporting Obligation; • to contain such legally binding representations andobligations as the Directors may determine; • to include an undertaking to notify the Company if theinformation in the certificate or declaration becomes incorrect, including priorto such change; • to be copied or provided to such Persons as the Directorsmay determine (including HMRC); and • to be executed in such form (including as a deed or deedpoll) as the Directors may determine. 162.3This Article shall apply notwithstanding any provisions to the contrary inany other Article (including, without limitation, Articles 129 to 138(Dividends)). 163 Notification of Substantial Shareholder and other status 163.1 Each shareholder and any other relevant Person shall serve notice inwriting on the Company at the Registered Office on: (a) him becoming a Substantial Shareholder or him being aSubstantial Shareholder on the date this Article comes into effect (togetherwith the percentage of voting rights, share capital or dividends he controls oris beneficially entitled to, details of the identity of the shareholder(s) whohold(s) the relevant Substantial Shareholding and such other information,certificates or declarations as the Directors may require from time to time); (b) him becoming a Relevant Registered Shareholder or being aRelevant Registered Shareholder on the date this Article comes into effect(together with such details of the relevant Substantial Shareholder and suchother information, certificates or declarations as the Directors may requirefrom time to time); and (c) any change to the particulars contained in any suchnotice, including on the relevant Person ceasing to be a Substantial Shareholderor a Relevant Registered Shareholder. Any such notice shall be delivered by the end of the second business day afterthe day on which the Person becomes a Substantial Shareholder or a RelevantRegistered Shareholder (or the date this Article comes into effect, as the casemay be) or the change in relevant particulars or within such shorter or longerperiod as the Directors may specify from time to time. 163.2 The Directors may at any time give notice in writing to any Personrequiring him, within such period as may be specified in the notice (being sevendays from the date of service of the notice or such shorter or longer period asthe Directors may specify in the notice), to deliver to the Company at theRegistered Office such information, certificates and declarations as theDirectors may require to establish whether or not he is a SubstantialShareholder or a Relevant Registered Shareholder or to comply with any ReportingObligation. Each such Person shall deliver such information, certificates anddeclarations within the period specified in such notice. 164 Distributions in respect of Substantial Shareholdings 164.1 In respect of any Distribution, the Directors may, if the Directorsdetermine that the condition set out in Article 161.9 is satisfied in relationto any shares in the Company, withhold payment of such Distribution on or inrespect of such shares. Any Distribution so withheld shall be paid as providedin Article 161.10 and until such payment the Persons who would otherwise beentitled to the Distribution shall have no right to the Distribution or itspayment. 164.2 The condition referred to in Article 161.8 is that, in relation to anyshares in the Company and any Distribution to be paid or made on and in respectof such shares: (a) the Directors believe that such shares comprise all or part ofa Substantial Shareholding of a Substantial Shareholder; and (b) the Directors are not satisfied that such SubstantialShareholder would not be beneficially entitled to the Distribution if it waspaid, and, for the avoidance of doubt, if the shares comprise all or part of aSubstantial Shareholding in respect of more than one Substantial Shareholderthis condition is not satisfied unless it is satisfied in respect of all suchSubstantial Shareholders. 164.3 If a Distribution has been withheld on or in respect of any shares in theCompany in accordance with Article 161.8, it shall be paid as follows: (c) if it is established to the satisfaction of the Directors that thecondition in Article 161.9 is not satisfied in relation to such shares, in whichcase the whole amount of the Distribution withheld shall be paid; and (d) if the Directors are satisfied that sufficient interests in all or someof the shares concerned have been transferred to a third party so that suchtransferred shares no longer form part of the Substantial Shareholding, in whichcase the Distribution attributable to such shares shall be paid (provided theDirectors are satisfied that following such transfer such shares concerned donot form part of a Substantial Shareholding); and (e) if the Directors are satisfied that as a result of a transferof interests in shares referred to in (b) above the remaining shares no longerform part of a Substantial Shareholding, in which case the Distributionattributable to such shares shall be paid. In this Article 161.10, references to the "transfer" of a share include thedisposal (by any means) of beneficial ownership of, control of voting rights inrespect of and beneficial entitlement to dividends in respect of, that share. 164.4 A Substantial Shareholder may satisfy the Directors that he is notbeneficially entitled to a Distribution by providing a Distribution TransferCertificate. The Directors shall be entitled to (but shall not be bound to)accept a Distribution Transfer Certificate as evidence of the matters thereinstated and the Directors shall be entitled to require such other information,certifications or declarations as they think fit. 164.5 The Directors may withhold payment of a Distribution on or in respect ofany shares in the Company if any notice given by the Directors pursuant toArticle 161.7 in relation to such shares shall not have been complied with tothe satisfaction of the Directors within the period specified in such notice.Any Distribution so withheld will be paid when the notice is complied with tothe satisfaction of the Directors unless the Directors withhold payment pursuantto Article 161.8 and until such payment the Persons who would otherwise beentitled to the Distribution shall have no right to the Distribution or itspayment. 164.6 If the Directors decide that payment of a Distribution should be withheldunder Articles 161.8 or 161.12, they shall within five business days give noticein writing of that decision to the Relevant Registered Shareholder. 164.7 If any Distribution shall be paid on a Substantial Shareholding and anExcess Charge becomes payable, the Substantial Shareholder shall pay the amountof such Excess Charge and all costs and expenses incurred by the Company inconnection with the recovery of such amount to the Company on demand by theCompany. Without prejudice to the right of the Company to claim such amount fromthe Substantial Shareholder, such recovery may be made out of the proceeds ofany disposal pursuant to Article 161.21 or out of any subsequent Distribution inrespect of the shares to such Person or to the shareholders of all shares inrelation to or by virtue of which the Directors believe that Person has aninterest in the Company (whether that Person is at that time a SubstantialShareholder or not). 165 Distribution Trust 165.1 If a Distribution is paid on or in respect of a Substantial ShareholdingDistribution paid in circumstances where the Substantial Shareholder is notbeneficially entitled to the Distribution), the Distribution and any incomearising from it shall be held by the payee or other recipient to whom theDistribution is transferred by the payee on trust absolutely for the Personsnominated by the relevant Substantial Shareholder under Article 161.16 in suchproportions as the relevant Substantial Shareholder shall in the nominationdirect or, subject to and in default of such nomination being validly madewithin 12 years after the date the Distribution is made, for the Company as maybe nominated by the Directors from time to time. 165.2 The relevant Substantial Shareholder of shares of the Company in respectof which a Distribution is paid shall be entitled to nominate in writing any twoor more Persons (not being Substantial Shareholders) to be the beneficiaries ofthe trust on which the Distribution is held under Article 161.15 and theSubstantial Shareholder may in any such nomination state the proportions inwhich the Distribution is to be held on trust for the nominated Persons, failingwhich the Distribution shall be held on trust for the nominated Persons in equalproportions. No Person may be nominated under this Article 161 who is or would,on becoming a beneficiary in accordance with the nomination, become aSubstantial Shareholder. If the Substantial Shareholder making the nomination isnot by virtue of Article 161.15 the trustee of the trust, the nomination shallnot take effect until it is delivered to the Person who is the trustee. 165.3 Any income arising from a Distribution which is held on trust underArticle 161.15 shall until the earlier of (i) the making of a valid nominationunder Article 161.16 and (ii) the expiry of the period of 12 years from the datewhen the Distribution is paid be accumulated as an accretion to theDistribution. Income shall be treated as arising when payable, so that noapportionment shall take place. 165.4 No Person who by virtue of Article 161.15 holds a Distribution on trustshall be under any obligation to invest the Distribution or to deposit it in aninterest-bearing account. 165.5 No Person who by virtue of Article 161.15 holds a Distribution on trustshall be liable for any breach of trust unless due to his own wilful fraud orwrongdoing or, in the case of an incorporated Person, the fraud or wilfulwrongdoing of its directors, officers or employees. 166 Obligation to dispose 166.1 If at any time, the Directors believe that: (f) in respect of any Distribution declared or announced, the conditionset out in Article 161.9 is satisfied in respect of any shares in the Company inrelation to that Distribution; (g) a notice given by the Directors pursuant to Article 161.7 inrelation to any shares in the Company has not been complied with to thesatisfaction of the Directors within the period specified in such notice; or (h) any information, certificate or declaration provided by aPerson in relation to any shares in the Company for the purposes of thepreceding provisions of this Article 161 was materially inaccurate ormisleading, the Directors may give notice in writing (a "Disposal Notice") to any Personsthey believe are Relevant Registered Shareholders in respect of the relevantshares requiring such Relevant Registered Shareholders within 21 days of thedate of service of the notice (or such longer or shorter time as the Directorsconsider to be appropriate in the circumstances) to dispose of such number ofshares the Directors may in such notice specify or to take such other steps aswill cause the condition set out in Article 161.9 no longer to be satisfied.The Directors may, if they think fit, withdraw a Disposal Notice. 166.2 If: (i) the requirements of a Disposal Notice are not complied with to thesatisfaction of the Directors within the period specified in the relevant noticeand the relevant Disposal Notice is not withdrawn; or (ii) a Distribution is paid on a Substantial Shareholding and an ExcessCharge becomes payable; the Directors may arrange for the Company to sell all or some of the shares towhich the Disposal Notice relates or, as the case may be, that form part of theSubstantial Shareholding concerned. For this purpose, the Directors may makesuch arrangements as they deem appropriate. In particular, without limitation,they may authorise any officer or employee of the Company to execute anytransfer or other document on behalf of the holder or holders of the relevantshare and, in the case of a share in uncertificated form, may make sucharrangements as they think fit on behalf of the relevant holder or holders totransfer title to the relevant share through a relevant system. 166.3 Any sale pursuant to Article 161.21 above shall be at the price which theDirectors consider is the best price reasonably obtainable and the Directorsshall not be liable to the holder or holders of the relevant share for anyalleged deficiency in the amount of the sale proceeds or any other matterrelating to the sale. 166.4 The net proceeds of the sale of any share under Article 161.21 (less anyamount to be retained pursuant to Article 161.14 and the expenses of sale) shallbe paid over by the Company to the former holder or holders of the relevantshare upon surrender of any certificate or other evidence of title relating toit, without interest. The receipt of the Company shall be a good discharge forthe purchase money. 166.5 The title of any transferee of shares shall not be affected by anirregularity or invalidity of any actions purportedly taken pursuant to thisArticle 161. 167 General 167.1 The Directors shall be entitled to presume without enquiry, unless anyDirector has reason to believe otherwise, that a Person is not a SubstantialShareholder or a Relevant Registered Shareholder. 167.2 The Directors shall not be required to give any reasons for any decisionor determination (including any decision or determination not to take action inrespect of a particular Person) pursuant to this Article 161 and any suchdetermination or decision shall be final and binding on all Persons unless anduntil it is revoked or changed by the Directors. Any disposal or transfer madeor other thing done by or on behalf of the Board or any Director pursuant tothis Article 161 shall be binding on all Persons and shall not be open tochallenge on any ground whatsoever. 167.3 Without limiting their liability to the Company, the Directors shall beunder no liability to any other Person, and the Company shall be under noliability to any shareholder or any other Person, for identifying or failing toidentify any Person as a Substantial Shareholder or a Relevant RegisteredShareholder. 167.4 The Directors shall not be obliged to serve any notice required underthis Article 161 upon any Person if they do not know either his identity or hisaddress. The absence of service of such a notice in such circumstances or anyaccidental error in or failure to give any notice to any Person upon whom noticeis required to be served under this Article 161 shall not prevent theimplementation of or invalidate any procedure under this Article 161. 167.5 The provisions of Articles 151 to 158 shall apply to the service upon anyPerson of any notice required by this Article. Any notice required by thisArticle 161 to be served upon a Person who is not a shareholder or upon a Personwho is a shareholder but whose address is not within the United Kingdom and whohas failed to supply to the company an address within the United Kingdompursuant to Article 153, shall be deemed validly served if such notice is sentthrough the post in a pre-paid cover addressed to that Person or shareholder atthe address if any, at which the Directors believe him to be resident orcarrying on business or, in the case of a holder of depository receipts orsimilar securities, to the address, if any, in the register of holders of therelevant securities. Service shall, in such a case be deemed to be effected onthe day of posting and it shall be sufficient proof of service if that noticewas properly addressed, stamped and posted. 167.6 Any notice required or permitted to be given pursuant to this Article mayrelate to more than one share and shall specify the share or shares to which itrelates. 167.7 The Directors may require from time to time any Person who is or claimsto be a Person to whom a Distribution may be paid without deduction of tax underRegulation 7 of the Real Estate Investment Trusts (Assessment, Collection andRecovery of Tax) Regulations 2006 to provide such certificates or declarationsas they may require from time to time. 167.8 These Articles may be amended by special resolution from time to time,including to give powers to the Directors to take such steps as they may requirein order to ensure that the Company can satisfy Condition 4 of Section 106 ofthe Finance Act 2006 (as such section may be modified, supplemented or replacedfrom time to time) which relates to close company status, which powers mayinclude the ability to arrange for the sale of shares on behalf of shareholders. By order of the Board Registered OfficeJ O Hambro Capital Management LimitedSecretaryGround Floor Ground FloorRyder Court Ryder Court14 Ryder Street 14 Ryder StreetLondon LondonSW1Y 6QB SW1Y 6QB 20 November 2006 Notes: 1. A member entitled to attend and vote at the meeting may appointone or more proxies to attend and, on a poll, vote instead of him or her. Aproxy does not need to be a member of the Company. A proxy may not speak at themeeting except with the permission of the Chairman of the meeting and may onlyvote on a poll (not on a show of hands). 2. A reply paid form of proxy is enclosed. To be valid, the form ofproxy and the original (or a certified true copy) of any power of attorney orother authority under which the form of proxy is signed must be deposited at theoffice of the Company's Registrars, whose address is shown on the form of proxy,no later than 11a.m. on 16 December 2006 (or, in the event of an adjournment,the time which is 48 hours before the adjourned meeting). Completion of the formof proxy will not affect the right of a Shareholder to attend and vote at thismeeting. 3. Under regulation 41 of the Uncertificated Securities Regulations2001, only persons included in the register of members of the Company at 6.00p.m. on 16 December 2006 (or, in the event of any adjournment, 6.00 p.m. on thedate which is two days before time of the adjourned meeting) are entitled toattend or vote at the meeting in respect of the shares registered in their namesat that time. Changes to entries on the register after the relevant deadlineshall be disregarded in determining the rights of any person to attend or voteat the meeting (or adjourned meeting). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Primary Health