15 February 2022

Crystal Amber Fund Limited

("Crystal Amber Fund" or the "Company")

Posting of Circular and Notice of General Meeting

Further to the Company's announcement of 28 January 2022, Crystal Amber Fund announces that it is sending today a circular to shareholders (the "Circular"). The Circular includes a notice of General Meeting to be held in connection with the proposals for a change of investment policy and new management and incentive arrangements, to be held at the offices of Ocorian Administration (Guernsey) Limited at Trafalgar Court, Les Banques, St Peter Port, Guernsey at 2 p.m. (UK time) on 7 March 2022.

The Board of Directors is mindful of the impact of the COVID-19 pandemic on the Meeting. Whilst the travel restrictions to Guernsey have been broadly lifted, shareholders are advised to consult the States of Guernsey's latest travel guidance at https://covid19.gov.gg/ before arranging to attend the Meeting in person.

Extracts from the circular are set below.  A copy of the Circular is available to download from the Company's website at: www.crystalamber.com/

For further enquiries please contact:

Crystal Amber Fund Limited

Chris Waldron (Chairman)

Tel: 01481 742 742

www.crystalamber.com

Allenby Capital Limited - Nominated Adviser

David Worlidge/Liz Kirchner

Tel: 020 3328 5656

Winterflood Investment Trusts - Broker

Joe Winkley/Neil Langford

Tel: 020 3100 0160

Crystal Amber Advisers (UK) LLP - Investment Adviser

Richard Bernstein

Tel: 020 7478 9080

Extracts from the Circular

(References to pages or paragraphs and appendices below refer to the relevant pages, paragraphs or appendices of the Circular and references to 'this document' refer to the Circular).

1.     Introduction and background to the Proposals

On 22 December 2021, the Fund provided an update following the results of its 2021 AGM where the resolution that the Company continue as constituted received a majority of votes, but did not achieve the required 75 per cent. majority of votes cast and accordingly was not passed.  By way of background, and as announced in 2013 on the basis it was never intended that the Fund would be evergreen, the Fund proposed that the 2021 AGM continuation vote should be subject to an extraordinary resolution, which would require a 75 per cent. majority.

As a result of the continuation vote not being passed, the Board believes that it is in the interests of Shareholders as a whole for the Fund to adopt a strategy of maximising capital returned to Shareholders by way of timely disposals, including trade sales of the Fund's strategic holdings, where appropriate. Such change of strategy is subject to Shareholder approval at the Extraordinary General Meeting.

The Fund has accumulated several strategic holdings: since 2013, the Fund has been a shareholder in Hurricane Energy plc (it currently has a 28.9 per cent. holding); since 2016, it has been a shareholder in Equals Group plc (it currently has a 13 per cent. holding); since 2017, it has been a shareholder in Allied Minds plc (it currently has an 18.2 per cent. holding); since 2018, it has been a shareholder in De La Rue plc (it currently has a 10 per cent. holding) and it has been a shareholder in Sutton Harbour plc for more than a decade (it currently has a 10.8 per cent. holding). Given the substantial progress achieved by the Fund with its activist strategy to date on these holdings, the Fund expects to have realised these investments by 31 December 2023. Within this timescale, the Fund also anticipates selling its holding in Board Intelligence plc, an unquoted company in which it has been a shareholder since 2018. 

The Fund has a track record of returning cash to Shareholders via share buybacks and dividends: since 2013, when the requirement for the continuation vote to be proposed at the 2021 AGM was introduced, £60 million has been returned to Shareholders via such means. The Fund intends to return all net proceeds from its holdings in Hurricane Energy plc, Allied Minds plc, Equals Group plc, De La Rue plc, Sutton Harbour plc and Board Intelligence plc, after providing for ongoing operational costs as necessary.  The Fund previously announced, based on the Investment Manager's assessment of the status and timing of anticipated corporate transactions, that it is targeting additional shareholder returns of at least £40 million or 50 pence per Share before 30 June 2022.  The payment of the 10p a share dividend to Shareholders on 9 February 2022, representing a gross return of £8.3 million, was the first shareholder return towards achieving that target. Whilst the Fund is confident that this is achievable, after consulting with several Shareholders, it is no longer considered to be in the interests of the Fund to impose a fixed deadline but will be keeping it as a target. 

Subject to Shareholder approval of the change of strategy, the Fund will not make any new investments and will only make further opportunistic investments in existing holdings where, in the view of the Board and Investment Manager, such investment is considered necessary to protect the interests of Shareholders and/or provide the Investment Manager with additional influence to maximise value and facilitate and accelerate an exit. Any such investment will require the prior approval of the Board and will only be permitted where it is not expected to compromise the timescale for realisations. 

GI Dynamics

In 2014 the Fund began to accumulate a shareholding in GI Dynamics. GI Dynamics is the developer of the EndoBarrier, a minimally invasive therapy for the treatment of Type 2 diabetes and obesity. EndoBarrier is a temporary bypass sleeve that is endoscopically delivered to the duodenal intestine. It offers similar effects to the surgical gastric bypass, without the risks of a major surgical procedure.

During the year to June 2021, GI Dynamics delisted from the Australian stock exchange. Its board and CEO were replaced with new executives and directors with medical device experience. As part of a US$10 million investment in preferred stock, the Fund's senior secured loan was converted, and warrants were cancelled. The Fund currently owns 81.3 per cent. of the fully diluted share capital of GI Dynamics, together with a $4.9 million convertible loan note.

After delays due to the COVID-19 surge in India, the I-STEP application for a randomised clinical trial of the EndoBarrier (to be conducted in conjunction with Apollo Sugar Clinics) was reviewed by regulators in India in June 2021. The Fund is pleased to report that in December 2021, regulators approved the commencement of this trial.

The global pandemic has reaffirmed the importance of gaining control of the significant risk factors associated with Type 2 diabetes and obesity. More than ever, medical professionals and patients alike are seeking minimally invasive and effective therapies to help control and resolve these chronic conditions. GI Dynamics is preparing to meet this large unmet clinical need.

The Investment Manager believes that because of its intensive activism, the investment in GI Dynamics now has considerable strategic value. This was recently evidenced by two approaches from US trade parties that have expressed an interest in making a significant investment in GI Dynamics. The Investment Manager looks forward to continuing to work with the company to achieve its operational milestones and to further develop the pathway to maximise Shareholder value. In due course, the Fund will consult with investors about the longer-term plans for GI Dynamics in order to realise value for its Shareholders. Given the anticipated value accretive milestones, the Investment Manager believes it is appropriate that it gives GI Dynamics the time it requires to maximise Shareholder returns. Accordingly, it may not be possible or desirable to effect a realisation of the Fund's holding in GI Dynamics by 31 December 2023 as set out above, by contrast to realisations of the Fund's other strategic holdings.

Investment Manager - reducing remuneration and revised incentivisation arrangements

The Board also believes that it is in the interests of Shareholders to incentivise the Investment Manager to maximise the realisation value of the investment portfolio in a timely manner.  As announced today, the Company has agreed to make amendments to the Investment Management Agreement by way of entering into a new Investment Management Agreement (the "New IMA"), conditional on the passing of the Resolutions. A summary of the amendments to the Investment Management Agreement is set out in paragraph 3 of this Part 1.

Proposals

This document therefore sets out details of, and seeks your approval of, the proposals relating to:

•             the approval of resolutions 1 and 2 as set out in the Notice of Extraordinary General Meeting, which will be proposed as ordinary resolutions;

•             the Future Strategy of the Company and associated adoption of the New Investment Policy; and

•             a new Investment Management Agreement incorporating new management and performance fee arrangements, together with changes to the termination provisions to reflect the Future Strategy and New Investment Policy;

(together the "Proposals"), as further summarised in paragraph 2 below.

The Proposals are subject to Shareholder approval and if approved, are expected to result in the realisation of predominantly all of the Company's assets (with the possible exception of GI Dynamics) by 31 December 2023 and the periodic return of capital to Shareholders. This document sets out in more detail the background to the Proposals and the reasons why the Board recommends that you vote in favour of the Resolutions to approve the Proposals.

Notice of the Extraordinary General Meeting to be held at the offices of Ocorian Administration (Guernsey) Limited at Trafalgar Court, Les Banques, St Peter Port, Guernsey at 2 p.m. on 7 March 2022 is set out at the end of this document.

2. Summary of the Proposals

2.1    Commencement of the Future Strategy and return of capital to Shareholders

Resolution 1 is being proposed to commence the realisation of predominantly all of the Company's assets (with the possible exception of GI Dynamics) for the benefit of all its Shareholders, with such realisations and return of capital to Shareholders expected to be  completed by 31 December 2023.

Resolution 1 also seeks to obtain Shareholder approval to (i) amend the Current Investment Policy to reflect a realisation strategy; and (ii) cease making any new investments except in very limited circumstances      as detailed in Part 2 of this document. The proposed amendments to the Current Investment Policy are considered a material change, which requires the consent of Shareholders in accordance with the AIM Rules.

In seeking the realisation of predominantly all the Company's investments by 31 December 2023 (with the possible exception of GI Dynamics), the Directors will aim to achieve a balance between maximising their net value and progressively returning cash to Shareholders. In so doing, the Board will take account of the continued costs of operating the Company. The Company's admission to AIM and the capacity to trade in its Shares will be maintained for as long as the Directors believe it to be practicable and cost-effective within the requirements of the AIM Rules.

While it is intended that predominantly all of the Fund's investments (with the possible exception of GI Dynamics) will have been realised by 31 December 2023, in the event that this is not achieved, the Directors will consider consulting Shareholders and/or make arrangements to seek Shareholder approval on the future strategy of the Fund, including any steps that might be necessary to maximise the opportunity to realise value from the remaining assets of the Company.

Part 2 of this document sets out the New Investment Policy in full.

2.2    Amendments to the Investment Management Agreement

Resolution 2 is being proposed to put in place a new Investment Management Agreement incorporating new management and performance fee arrangements, together with changes to the termination provisions to reflect the future strategy of the Company. The Board believes that it is in the interests of Shareholders to incentivise the Investment Manager to maximise the realisation value of the investment portfolio in a timely manner. A summary of the key changes to the Investment Management Agreement is set out in paragraph 3 of Part 1 and Part 4 of this document. Resolution 2 is conditional on the passing of Resolution 1.    

3. Related party transaction - reduced remuneration and revised incentivisation arrangements for the Investment Manager to align with cash returned to shareholders

Under the current Investment Management Agreement, the Investment Manager receives a management fee as set out in Part 3 of this document, which for the quarter ending 31 March 2022 amounts to £448,320.  In addition, the Investment Manager is currently entitled to receive a performance fee of 20 per cent. of the excess of the NAV per Ordinary Share at the end of the relevant performance period over the higher of:

-           the Basic Performance Hurdle;

-           the NAV per Ordinary Share at the start of the relevant performance period (less any dividends or other distributions in respect of all outstanding Ordinary Shares declared (on a per share basis) since then; and

-           the high-water mark (in each case on a per Ordinary Share basis) multiplied by the time weighted average of the number of Ordinary Shares in issue in the Performance Period.

At 30 June 2021, the Basic Performance Hurdle was 249.84 pence (as adjusted for all dividends paid during the performance period on their respective payment dates, compounded at the applicable annual rate) (2020: 230.03 pence), and the high-water mark (adjusted for dividends) was 241.62 pence.

The NAV per Ordinary Share before any accrual for the performance fee payable in respect of the year was 153.11 pence, excluding the issuance of charitable shares on 25 September 2020. Accordingly, no performance fee was earned during the year ended 30 June 2021 (2020: £Nil).

As at 31 December 2021, the Basic Performance Hurdle (as adjusted for the dividend paid on 4 August 2021, compounded at the applicable annual rate) was 259.15 pence.

During the life of the Fund to date, the day-to-day running of the investment portfolio including identifying and researching new investment opportunities, considering the most appropriate activism strategies and engaging with investee management has been conducted by the Investment Manager under the Investment Management Agreement.  Under the proposed Future Strategy, the Fund will not be seeking to make new investments and will instead be seeking to maximise the value of the existing investment portfolio as it realises such investments. Accordingly, the Board and the Investment Manager have agreed to enter into the New IMA, subject to the adoption of the Future Strategy and Shareholder approval.

The principal terms of the proposed New IMA are as follows:

-     From 1 April 2022, the management fee will be reduced to £106,666 per month until 30 June 2022, falling to £90,000 per month until 31 December 2022, falling to £70,000 per month until 30 June 2023, falling to £50,000 per month until 30 September 2023 and falling to £40,000 per month until 31 December 2023 (or if earlier, the date on which all the Fund's investments have been substantially realised) when the management fee will cease. For these purposes "substantially realised" means the date on which all of the Fund's investments (other than the Fund's investment in GI Dynamics) have been realised;

-     The performance fee will be calculated by reference to the aggregate cash returned to Shareholders after 1 January 2022 and the Investment Manager will receive 20 per cent. of the aggregate return of cash paid to Shareholders after 1 January 2022 (including the interim dividend of 10 pence per Ordinary Share declared on 22 December 2021) in excess of a threshold of £216,000,000, being the Basic Performance Hurdle per share as at 31 December 2021 multiplied by the voting share capital. This threshold represents a premium of approximately 81 per cent. over the unaudited Net Asset Value at 31 December 2021 of 143.2 pence per share and a premium of approximately 127 per cent. over the market capitalisation of the Fund at that date, based on the closing mid-market share price on 31 December 2021 of 114 pence, and 83,365,000 voting rights attributable to the Ordinary Shares as at that date. Returns of cash to Shareholders are expected to include share redemptions, dividends, share buybacks and any other means of cash distributions to Shareholders effected after 1 January 2022;

-     If the New IMA continues beyond 31 December 2023, the Manager may continue to be entitled to a performance fee on returns of cash to the extent earned in excess of the threshold of £216,000,000, and on the basis, described above;

-     The Fund will have the following additional termination rights to reflect the adoption of the Future Strategy whereby the Fund will be able to terminate the New IMA with immediate effect within the period of six months following (i) the passing of a resolution of Shareholders for the winding up of the Company; (ii) 31 December 2023; and (iii) the date on which all the Fund's investments (other than the Fund's investment in GI Dynamics) have been realised.

Set out in Part 3 of this document is a summary of the terms of the current investment management agreement and incentive arrangements for the Investment Manager.

Set out in Part 4 of this document is a summary of the terms of the New IMA.

Pursuant to the AIM Rules, the Manager is deemed to be a related party of the Company and the amendments to the Investment Management Agreement are therefore deemed to be a related party transaction. The Directors consider, having consulted with Allenby Capital Limited, the Company's Nominated Adviser, that the amendments to the Investment Management Agreement are fair and reasonable insofar as Shareholders are concerned.

4. Future returns of cash to Shareholders and Dividend policy

Following any material realisations of the Fund's investments, the Directors intend to return cash to Shareholders using tax-efficient means such as redeemable shares and/or tender offers.  Should Shareholders approve the Proposals, the Directors intend to seek Shareholder approval to put mechanisms in place to enable such distributions to take place at the appropriate time.

The Board intends to return cash to Shareholders by way of capital distributions.  Accordingly, the Board intends to suspend the declaration of dividends until further notice.

5. Details of the Extraordinary General Meeting

Location, Date and Time

The Proposals are subject to Shareholder approval. Set out at the end of this document is the Notice of the Extraordinary General Meeting to be held at the offices of Ocorian Administration (Guernsey) Limited at Trafalgar Court, Les Banques, St Peter Port, Guernsey at 2 p.m. on 7 March 2022, where the following resolutions will be proposed:

Resolutions

•       Resolution 1 is proposed as an ordinary resolution which will authorise the Directors to (i) pursue the Future Strategy, as set out in Part 1 of this document; (ii) commence the complete realisation of the Company's assets to maximise the value of its assets for the benefit of all its Shareholders, with such realisation and return of capital to Shareholders expected to be substantially completed (with the possible exception of GI Dynamics) by 31 December 2023; and (iii) to adopt the New Investment Policy, as set out at Part 2 of this document, in substitution for the Current Investment Policy.

•       Resolution 2 is proposed as an ordinary resolution to approve the New IMA. Resolution 2 is conditional on the passing of Resolution 1.    

Voting 

The Resolutions will be conducted on a poll. An ordinary resolution will require more than 50 per cent. of the votes cast (whether in person or by proxy) to be in favour in order for it to be passed. 

6. Recommendation

Based on discussions with Shareholders, the Board believes that the Proposals are in the best interests of the Company and its Shareholders as a whole.

Accordingly, the Board recommends that Shareholders vote in favour of the Resolutions to be proposed at the Extraordinary General Meeting, as they intend to do in respect of their own shareholdings which total, in aggregate, 51,200 Ordinary Shares, representing, 0.06% of the voting rights of the Company.

The Investment Manager, which holds 6,949,031 Ordinary Shares, representing 8.34 per cent. of the voting rights of the Company, has advised that it will vote in favour of Resolution 1 and 2.

Definitions