PJF Prospect Japan

Prospect Japan Fund Limited

Recommended Proposal Relating to the Exercise of Stock Acquisition Rights

Further to the announcement on 16 December 2015 regarding the purchase by Prospect Japan Fund Limited (the “Company”) of stock acquisition rights (“SARs”) in Prospect Co., Ltd (“Prospect Co.”), the Company is today publishing a circular (the “Circular”) containing a recommended proposal relating to the exercise of the SARs pursuant to the terms of an agreement governing their exercise (the “Exercise Agreement”). A copy of the Circular will be sent to Shareholders and will be submitted to the National Storage Mechanism.

The Chairman’s Letter, as contained in the Circular, is set out below.

“To the Shareholders

Dear Sir or Madam

Recommended Proposal Relating to the Exercise of Stock Acquisition Rights Issued by Prospect Co., Ltd

INTRODUCTION

I am writing to you in connection with the purchase by the Company on 21 December 2015 of 1,440 stock acquisition rights from Prospect Co., Ltd (“Prospect Co.”) each of which gives the Company the right to purchase 100,000 ordinary shares in Prospect Co. at ¥5.4 million per stock acquisition right (or ¥54 per ordinary share) (the “SARs”). As announced on 16 December 2015, the Company purchased the SARs for ¥288 million (approximately $2.4 million).

Since Prospect Co. is the parent company of the Manager, Prospect Asset Management (Channel Islands) Limited, the purchase of the SARs constituted a related party transaction for the purposes of the Listing Rules. Because the cost of the purchase was below certain size thresholds in the Listing Rules, the smaller related party provisions in the Listing Rules applied and the required announcement was made on 16 December 2015.

TERMS OF THE SARS

The Company purchased the SARs for ¥200,000 per SAR on 21 December 2015 for a total cost of ¥288 million pursuant to the terms of the Subscription Agreement (see paragraph 3 of Part II below for a summary of the terms of the Subscription Agreement). Each SAR gives the Company the right to purchase 100,000 ordinary shares in Prospect Co. which can be exercised at any point from 21 December 2015 until 20 December 2020 (the “Exercise Period”). The SARs are exercisable at a price of ¥5.4 million per SAR (¥54 per Prospect Co. ordinary share) for a total cost to the Company of ¥7.776 billion. The Company was the sole subscriber for the SARs, the SARs are unlisted and are freely transferable.

The initial exercise price of the SARs will be ¥5.4 million per SAR (or ¥54 per Prospect Co. ordinary share) but this exercise price will be subject to adjustment on the occurrence of certain anti-dilution adjustment events in accordance with the terms and conditions of the SARs as summarised in paragraph 3 of Part II.

In the event that the price of the Prospect Co. ordinary shares on the Tokyo Stock Exchange reaches ¥108 for a period of ten consecutive trading days, Prospect Co. has the right to repurchase the SARs from the Company at a price of ¥200,000 per SAR (or ¥2 per ordinary share). In the event that Prospect Co. exercises this right of repurchase it is required to give the Company ten business days’ notice and the repurchase may take place on the 20th business day following the tenth trading day on which the Prospect Co. share price reached ¥108.

The Company’s Investment Policy provides that the Company may not “invest or lend more than 25 per cent. of its assets at the time the investment is made in securities of any one company or single issuer (other than obligations of the Japanese Government or its agencies or of the US Government or its agencies)”. Therefore the Company is prohibited, by the terms of its Investment Policy, from exercising 1,440 SARs in one transaction. Furthermore, in order to provide clarity in relation to the timing and circumstances of the exercise of the SARs the Company has entered into an agreement, conditional on the approval of Shareholders, with Prospect Co. setting out the terms of exercise of the SARs (the “Exercise Agreement”).

As set out below, the Exercise Agreement provides that the Company may only exercise the SARs in accordance with the terms of the Exercise Agreement. The discretion of the Company to choose to exercise the SARs pursuant to the terms of the Subscription Agreement has therefore been superseded by the terms of the Exercise Agreement, where Prospect Co. has the right subject to certain conditions to require the Company to exercise the SARs. In the event that the Exercise Agreement is terminated any further exercise of the SARs by the Company would be subject to the provisions of Listing Rule 11, and further Shareholder approval may be required.

THE EXERCISE AGREEMENT

The terms of the Exercise Agreement provide that Prospect Co. has the right to require the Company to exercise a predetermined number of SARs, subject to, inter alia, the share price of Prospect Co. closing at ¥56 or more per ordinary share on each day such right is exercised and the value of the Prospect Co. ordinary shares held by the Company amounting to less than 5 per cent. of the Company’s gross assets. A summary of the terms of the Exercise Agreement is set out in paragraph 4 of Part II below.

The Exercise Agreement may require the Company, subject to the conditions set out therein, to purchase in aggregate 144,000,000 ordinary shares in Prospect Co. for ¥54 per ordinary share, for a total cost of ¥7.776 billion (approximately $64.2 million). The Exercise Agreement also provides that the Company only exercises the SARs in accordance with the terms of the Exercise Agreement and that in the event the Company fails to exercise the required number of SARs, Prospect Co. is entitled to repurchase such number of SARs at ¥200,000 per SAR (or ¥2 per ordinary share).

The Listing Rules require the Company to consider the obligations set out in the Exercise Agreement in light of a potential total investment in Prospect Co. which could, in any 12 month period, total ¥7.776 billion (approximately $64.2 million). Because of the size of the prospective transaction (if the SARs are exercised in full) the smaller related party provisions in the Listing Rules do not apply.

Entering into the Exercise Agreement is therefore conditional upon Shareholder approval. The Resolution to approve the Exercise Agreement, which is to be proposed at the Extraordinary General Meeting as an ordinary resolution, is set out in the notice of the Extraordinary General Meeting at the end of this document.

The purpose of this letter is to outline the reasons for entering into the Exercise Agreement and explain why the Board: (i) considers the Exercise Agreement to be in the best interests of the Company and Shareholders as a whole; and (ii) recommends that you vote in favour of the Resolution. Since Rupert Evans is a director of the Manager, he is not considered to be independent and has therefore not taken part in the Board’s consideration of the Exercise Agreement.

RATIONALE FOR THE PURCHASE AND EXERCISE OF THE SARS PURSUANT TO THE TERMS OF THE EXERCISE AGREEMENT

Prospect Co. is listed on the Tokyo Stock Exchange (Tokyo Stock Exchange code: 3528) with a market capitalisation of ¥7.99 billion ($66 million). It owns and operates a number of Japanese based businesses including a real estate developer, a construction company, an investment management business and, most recently, it has started a solar power generation business. Its investment management business is the Manager.

On 17 November 2015 Prospect Co. announced to the Tokyo Stock Exchange that it proposed to issue the SARs to the Company, subject to receiving the required shareholder approvals. On 16 December 2015 the shareholders of Prospect Co. approved the issue of the SARs to the Company on the terms set out above.

The proceeds received by Prospect Co. for the purchase of the SARs on 21 December 2015 and the proceeds receivable by Prospect Co. in the event that the SARs are exercised will provide it with capital to develop its solar power generation business and extend its corporate activity in Japanese listed companies. The Company believes it is in the interest of Shareholders to invest in the SARs as it believes that the SARs are an attractive option on the ordinary shares of Prospect Co. and that the Prospect Co. share price is likely to exceed ¥54 during the Exercise Period. Furthermore, the corporate activism undertaken by Prospect Co. realises value for Shareholders in instances where it relates to the Japanese listed companies which are also held by the Company.

The Exercise Agreement sets out clear parameters for when Prospect Co. is able to require exercise of the SARs. This will result in the requests to exercise the SARs only being made when the market price of Prospect Co.’s shares exceed the exercise price and the Company’s investment in Prospect Co.’s ordinary shares is less than 5 per cent. of the Company’s gross assets. Furthermore, since Shareholder approval is being sought now, the exercise of the SARs pursuant to the Exercise Agreement can be done on a timely basis thereby giving the Company greater trading flexibility in relation to the resulting ordinary shares in Prospect Co.

As at 29 January 2016 (being the latest practicable date prior to the publication of this document) Prospect Co.’s share price was ¥49 (40 US cents) per ordinary share with a three month trading range to the same date of ¥42 to ¥59 per ordinary share.

RELATED PARTY TRANSACTION

As noted above, Prospect Co. is the ultimate parent company of the Manager and, in light of being a member of the Manager’s group, is accordingly classified as a related party of the Company.

The Listing Rules require that a listed company related party transaction must be approved by Shareholders other than the related party (or its Associates), unless certain exemptions apply. Entering into the Exercise Agreement may require the Company to acquire an investment in accordance with the Investment Policy, which in aggregate represents approximately 54.7 per cent. of the Company’s gross assets as at the date of this letter. Since no exemptions are applicable in relation to the Exercise Agreement, the Exercise Agreement is subject to the passing of the Resolution, which will be proposed as an ordinary resolution and will require the approval of a majority of the Shareholders voting on the Resolution. The Manager has undertaken not to, and to take all reasonable steps to ensure that its Associates will not, vote on the Resolution.

The Board, having been so advised by Stockdale Securities, considers the terms of the Exercise Agreement to be fair and reasonable insofar as Shareholders are concerned. In providing advice to the Board, Stockdale Securities has taken into account the Board’s commercial assessments of the Exercise Agreement.

RESOLUTION

You will find set out at the end of this document, a notice convening an EGM of the Company to be held at 10.00 a.m. on 24 February 2016. The Resolution to be proposed at the EGM to approve the Exercise Agreement will be proposed as an ordinary resolution.

Pursuant to Regulation 48 of the Uncertificated Securities (Guernsey) Regulations 2009, entitlement to attend and vote at the meeting and the number of votes which may be cast thereat will be determined by reference to the register of members of the Company at close of business on the day which is 48 hours before the time of the meeting. Changes to entries on the register of members after that time shall be disregarded in determining the rights of any person to attend and vote at the meeting.

ACTION TO BE TAKEN

Whether or not you intend to attend the EGM you should ensure that your Proxy Appointment is returned in hard copy form by post, by courier or by hand to the Company’s registrars, Computershare Investor Services (Jersey) Limited, c/o The Pavilions, Bridgwater Road, Bristol BS99 6ZY by no later than 48 hours before the time for holding of the EGM. To be valid, the relevant Proxy Appointment should be completed in accordance with the instructions accompanying it and lodged with the Company’s registrars by the relevant time.

Completion and return of the Proxy Appointment will not affect a Shareholder’s right to attend, speak and vote at the EGM.

RECOMMENDATION

The Board are of the opinion that the Exercise Agreement is in the best interests of the Company and its Shareholders as a whole and unanimously recommends that Shareholders vote in favour of the Resolution to be proposed at the EGM. Rupert Evans has not taken part in the Board’s consideration of the Exercise Agreement and has refrained from voting on any Board decisions with regard to it.

Yours faithfully
John Hawkins
Chairman”

Terms used and not defined in this announcement bear the meaning given to them in the Circular to be published today.

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