RBS 2010 Annual Report Download - page 404

Material contracts continued
HM Treasury has agreed to waive its statutory pre-emption rights arising
out of the B shares and the Dividend Access Share in respect of any
future issue of equity securities by the company other than B shares and
has agreed to vote its B shares and the Dividend Access Share, as
applicable, in favour of each special resolution to disapply its pre-
emption rights under the B shares and/or the Dividend Access Share
then held by HM Treasury every time they arise. The pre-emption rights
arising out of the B shares and the Dividend Access Share have also
been disapplied in the Articles of Association.
HM Treasury has agreed that it shall not be entitled to exercise its option
to convert B shares into ordinary shares to the extent that it holds more
than 75 per cent of the ordinary shares of the company or to the extent
that the exercise of such option would result in it holding more than 75
per cent of the ordinary shares of the company.
HM Treasury has agreed that it shall not be entitled to vote the B shares
or the Dividend Access Share to the extent that votes cast on such B
shares and the Dividend Access Share, together with any other votes
which HM Treasury is entitled to cast in respect of any other ordinary
shares held by or on behalf of HM Treasury, would exceed 75 per cent of
the total votes eligible to be cast on a resolution proposed at a general
meeting of the company.
For as long as it is a substantial shareholder of the company (within the
meaning of the UKLA's Listing Rules), HM Treasury has undertaken not
to vote on related party transaction resolutions at general meetings and
to direct that its affiliates do not so vote.
Accession Agreement and the UK Asset Protection Scheme Terms and
Conditions
The company acceded to the APS through an accession agreement (the
"Accession Agreement") entered into with HM Treasury, which became
effective on 22 December 2009. Supplemental agreements were signed
on 27 August 2010, 20 December 2010 and 10 February 2011. The
Accession Agreement incorporates the terms and conditions of the APS
set out in the document entitled ‘UK Asset Protection Scheme Terms and
Conditions’ which is available on HM Treasury's website (the ‘Scheme
Conditions’). The Accession Agreement which incorporates the Scheme
Conditions is accounted for as a credit derivative and it tailors the APS to
the company (by, amongst other things, setting applicable bank-specific
thresholds and addressing a limited number of other bank-specific
issues).
Under the APS, HM Treasury is liable to make payments to the company
in respect of a pre-defined pool of assets and exposures (the "Covered
Assets") in respect of which a specified failure to pay, bankruptcy or
restructuring trigger occurs or is deemed to occur. Payments under the
APS are intended to protect the company, over time, for 90% of the
amount by which cumulative losses on the whole portfolio of Covered
Assets (as reduced by cumulative recoveries on the portfolio) exceed a
fixed first loss threshold of £60 billion. Cumulative losses (as reduced by
cumulative recoveries) below the first loss threshold, and a 10% vertical
slice of any cumulative losses (as reduced by cumulative recoveries)
exceeding the first loss threshold, are for the account of the company.
Protection under the APS is, subject to various requirements under the
Scheme Conditions, provided in respect of the Covered Assets on the
company's consolidated balance sheet as at 31 December 2008 with an
aggregate covered amount of £282 billion. Protection under the APS may
be lost or limited in certain specified circumstances, including the failure
of a Covered Asset to satisfy certain asset eligibility criteria set out in the
Scheme Conditions.
During the life of the APS, the company will pay HM Treasury a non-
refundable annual fee (payable in advance) of £700 million per annum for
the first three years of the APS and £500 million per annum until the
earlier of (i) the date of termination of the APS and (ii) 31 December 2099.
The annual fee can, subject to HM Treasury's consent, be paid wholly or
partly by means of the waiver of certain UK tax reliefs that are treated as
deferred tax assets or funded by the issuance of additional B shares to
HM Treasury.
The company has the right, in certain circumstances, to withdraw from
the APS permanently all or part of a Covered Asset. In addition, the
company contractually has the right to terminate the APS exercisable at
any time provided that the FSA has confirmed in writing to HM Treasury
that it has no objection to the proposed termination. An exit fee and,
potentially, a refund of HM Treasury's net payments under the APS are
payable by the company upon such termination. The Scheme Conditions
also contain various provisions and restrictions on the management and
administration of the Covered Assets and certain related assets. The
company is obliged to manage such assets in accordance with the asset
management objective, which is to maximise the expected net present
value of such assets (discounted at an HM Treasury rate), including by
minimising losses and potential losses and maximising recoveries and
potential recoveries. The company also has monitoring and reporting
obligations under the Scheme Conditions which are aimed at
transparency in respect of the Covered Assets to enable HM Treasury to
manage and assess its exposure under the APS. In addition, the
company has to establish a separate governance structure for the
purposes of the APS. Further, the Scheme Conditions and the Accession
Agreement also contain requirements for the development of a
remuneration policy for the Group and specific remuneration
requirements for certain officers and employees of the company.
HM Treasury has the right to appoint one or more step-in managers to
exercise extensive step-in rights in relation to all or some of the Covered
Assets upon the occurrence of certain specified trigger events.
Certain Scheme Conditions are subject to modification at any time with
retrospective effect at the discretion of HM Treasury without the
company's consent. The modification rights arise broadly and subject to
certain conditions where the operation, interpretation or application of
such Scheme Conditions conflicts with any of the overriding general
principles set out in the Scheme Conditions.
There are material restrictions on the form and substance of
announcements or public statements (including any required by law or
the rules of any securities exchange) made by the Group in relation to the
APS or to HM Treasury in connection with the APS without HM
Treasury's consent.
RBS Group 2010402
Additional information continued