ARC CAPITAL HOLDINGS LTD
On 27 August 2014, ARC Capital Holdings Limited ("ARCH") (AIM:ARCH) announced that Fortress Group Limited ("FGL") received a notice dated 25 August 2014 (the "Put Option Notice") issued by PAGAC Fortress Holding I Limited ("PAGAC") to exercise the put option (the "FGL Put Option") referred to in the shareholder agreement dated 25 August
2011 (the "Shareholder Agreement") that ARCH Digital Holdings Limited ("ARCH Digital"), a wholly owned subsidiary of ARCH, entered into at the time of the privatisation of Funtalk China Holdings Limited ("Funtalk"). According to the Put Option Notice, the put price as at 25 August 2014 was USD388,323,141.
As set out in ARCH's announcement dated 28 August 2014, Mr Borrelli, ARCH's representative on the FGL Board, has been informed by FGL that FGL does not have the necessary cash or liquid assets to meet its obligation in full under the FGL Put Option. Further, if FGL fails to perform its obligation under the FGL Put Option, the requirement to repurchase PAGAC's holding in the preferred shares (the "Preferred Shares") and convertible bonds (the "Convertible Bonds") issued by FGL falls to the shareholders of FGL other than the PAGAC pro-rata, including ARCH Digital.
On 2 September 2014, the FGL Board resolved to repurchase all of the Convertible Bonds and 2,093 out of the 4,999 Preferred Shares at the price of approximately USD250 million. Five out of six of FGL's directors attended the FGL Board meeting, including the three directors who are also employees of an affiliate of PAGAC. Mr Borrelli was the only board member of FGL who did not vote in favour of the resolutions.
On 3 September 2014, ARCH Digital received a notice from PAGAC notifying ARCH Digital that FGL has failed to pay the entire put price with respect to the FGL Put Option and that PAGAC is exercising its right pursuant to the Shareholder Agreement to require that ARCH Digital purchase its pro rata portion of the put securities that were not purchased by FGL (the "ARCH Digital Put Option"). The ARCH Digital Put Notice further stated that the unpaid put price attributable to ARCH Digital is USD52,322,284, and that ARCH Digital is required to pay this amount within 10 business days, i.e. no later than 17 September 2014.
Neither ARCH Digital nor ARCH has the necessary cash or liquid assets to pay the unpaid put price attributable to ARCH Digital as required in the ARCH Digital Put Option. As set out in ARCH's announcements dated 25 April 2014 and 28 August 2014, ARCH Digital has, by a share charge agreement dated 25 August 2011 (the "Share Charge Agreement"), conferred on PAGAC a security interest over ARCH Digital's equity holding in FGL (the "Charged Assets") to secure, among other things, ARCH Digital's performance of its obligations under the Shareholder Agreement. If ARCH Digital fails to perform its obligations under the Shareholder Agreement, including its obligation with respect to the ARCH Digital Put Option, PAGAC may enforce its security under the Share Charge Agreement, including, but not limited to, to receive and retain all dividends, interest, distributions or assets accruing in respect of the Charged Assets, and to sell, transfer, grant options over or otherwise dispose of the Charged Assets. All money received by PAGAC under the Share Charge Agreement shall be paid in accordance with that agreement,
including towards satisfaction of any amounts in respect of ARCH Digital's obligations under the Shareholder Agreement. Any surplus remaining following payment under the Share Charge Agreement will be repaid to ARCH Digital.
If PAGAC enforces its security interest under the Share Charge Agreement, there is a high chance that the value of ARCH Digital's interest in FGL could be fundamentally impaired notwithstanding that the value of the interest in ARCH Digital has already been written down to zero. ARCH has not guaranteed ARCH Digital's obligations under the Shareholder Agreement.
The board of ARCH is considering its options with its legal advisors.
A further announcement will be made in respect of any material developments on this matter. For more information please contact:
ARC CAPITAL HOLDINGS LIMITED: Steve Feniger, Chairman of the Board
E: steve.feniger@gmail.com
CONSULTANT TO THE BOARD: Cosimo Borrelli
Managing Director, Borrelli Walsh Limited
T: (852) 3761 3800
E: cb@borrelliwalsh.com
NOMINATED ADVISER:
Philip Secrett, Grant Thornton UK LLP T: (44) 20 7383 5100
E: Philip.J.Secrett@uk.gt.com
BROKER:
David Benda / Hugh Jonathan, Numis Securities Limited
T: (44) 20 7260 1000
E: d.benda@numiscorp.com
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