Fellow shareholders,

Chelsea Pitch Owners director Gray Smith has completed his inquiry into the overselling of shares in the run-up to last year's EGM.

Gray is a Partner at renowned law firm Mischon de Reya and heads up their Funds and Financial Services team.

Here is the report in full:

Chelsea Pitch Owners PLC - Issues of Shares in 2011
I have been asked to look at the issue of shares in the period running up to the EGM last year, from the company's point of view, with the aim of seeing what can be done about the shares issued at the time, and the lessons to be learned for the future.

During the period from the AGM of Chelsea Pitch Owners PLC (CPO) in 2010 and the suspension of the issue of new shares in the run-up to the holding of the EGM in October 2011, the Company issued 2,686 new shares.

To issue new shares (other than on a pro rata basis to existing shareholders) a company needs two distinct authorities from its shareholders:

(i) an ordinary resolution to allot the number of shares in question (the Allotment Authority); and

(ii) a special resolution to allot those shares on a non-pre-emptive basis (the Disapplication of Pre-emption Authority).

In respect of the 2,686 new shares issued, CPO did not have either an Allotment Authority or a Disapplication of Pre-emption Authority in respect of 1,686 of those shares.

The Law
The law is surprisingly unhelpful. Ideally, we would be able to simply revoke the issue of shares issued in excess of the Authorities, as a matter of company law, the usual position is that an allotment of shares in excess of the Authorities still constitutes a valid allotment in the hands of the receiving shareholder. There is some case law that suggests that where the allotment was not for a proper corporate purpose (e.g. to assist with voting at a general meeting) then a Court may hold the allotment to have been void, but it would have to be shown that this was the intention behind the issue by CPO. In any event, the issue in excess of the Authorities will be a breach by the directors of their statutory duties (e.g. to act within their powers) and, if done so knowingly, would also constitute an offence under the Companies Act.

As regards the next steps that the Company should take, there have been various courses of action proposed. These include (in no particular order):

Declaring a Concert Party
Under the Takeover Code a concert party is formed when parties come together to obtain or consolidate control of 30% or more of the voting rights in a public company. The coming together of a concert party does not trigger the requirement to make an offer for the company, even if the concert party holds 30% or more at the time when it comes together. However, if any member of a concert party were to make an acquisition which took their aggregate holding over 30% or increased a 30%+ holding, then this would trigger a requirement to make an offer for the remaining shares.

Even if these thresholds were satisfied, which does not appear to be the case, there seems little point pursuing this analysis as a takeover offer is not the outcome we believe the shareholders would be looking for.

Buy back of the Shares
A company may buy back shares if it has the authority to do so from its shareholders (a special resolution), it has sufficient distributable profits (or there are sufficient proceeds from a fresh issue of shares issued for this purpose) and it has the cash available as well. However, to buy back shares from certain individuals only (as opposed to inviting all shareholders to sell their shares back to the company) would of course require the consent of those shareholders. The funding of any such buyback would be an issue. CPO has an obligation to pass over the vast majority of funds raised on a share sale to pay back the original loan. It is unlikely the club would waive this. We would therefore need to raise a significant sum in order to be able to pay out any shareholder who agreed to sell his share.

A slight variation on this may be to try to line-up buyers for any shares which relevant shareholders agreed to sell - transfers are not subject to the requirement to pay money over to the club. However, this still relies on a willingness to sell.

Contractual dis-enfranchisement
If the relevant shareholders were agreeable, they could agree a matter of contract with the company not to vote their shares but to nevertheless hold on to the shares. It is not clear what would motivate these shareholders to agree to this, but it could be requested.

Changing the Rights of the shares in question
There have been many suggestions such as to limit the voting rights of these shares or put them into a different class etc. The problem with all such suggestions is that now the shares have been issued, they must be treated in the same way as all other shares. In other words, anything limiting the rights attached to these shares must be applied to all other shares in issue. They cannot be put into a different class or in any way have their right to vote etc, changed, in a way that does not apply to all shareholders.

Change the rights attached to all shares
While this is possible, with the consent of a special resolution of the company (a vote in favour by 75% of the votes cast) it will affect all shares equally. Therefore, if we were to, say, suggest that no shareholder has more than 10 votes regardless of the number of shares held, this would apply to all, no matter when they bought their shares. Even if shareholders were willing to agree to this, it would still be open to those shareholders to simply transfer parcels of shares to others, so that each held ten shares and still carried all the original voting rights.

Make changes to future issues
This is easier to do - we could make all shares non-voting which are issued in future. This could be achieved by changing the articles of association. However, it is likely to severely affect the attraction of buying the shares for everyone, and will affect those opposed to the position put forward at last year's EGM as much as those who are in favour.

Tighten up the issuing process
This is easy and something we should do. Everyone who applies for shares could be required to supply their full name and address, and proof of address such as a utility bill. The same should apply to anyone to whom a share is transferred.

Notice Requiring Information re Shares
Given that there are concerns with regard to the share issue, CPO could make use of the provisions in the articles of association, coupled with the Companies Act, to serve notice on any person who is interested in the shares. The notice can require the shareholder to:

Indicate in writing the capacity in which he holds the shares or any interest therein, or ….the persons who have an interest in them and the nature of their interest or whether any of the voting rights attached to the shares are the subject of an agreement or arrangement under which another person is entitled to control the exercise of those rights.

The serving of the notice would require the recipient to give the information within a set time. If someone is holding as a nominee, this should be disclosed. There is a possibility of tying this in with a Companies Act request, which would lead to the making of a false reply a crime. Under article 41 of the Company's articles of association if a person does not comply with this information request their rights to vote, receive dividends and transfer their shares may be suspended.

Proscribe the issue of shares to those connected with the club
We could investigate the issue of prohibiting the holding of shares by those who hold office with the club or their associates. The feasibility of this measure and whether this could be made to apply to existing shareholders would require some further work. This would involve amending the articles of association, again requiring a special resolution.

Review of Issue Process
As a matter of completeness, we should also review how the shares were issued. We should look to see if there was anything improper or incorrect in the process itself which might invalidate the process, or lead to the company being able to request further information.

By way of a summary of the consequences for issuing shares in excess of the Authorities:
(i) as regards issuing shares in excess of the Allotment Authority, a director who knowingly contravenes, or permits the contravention is liable to a fine;

(ii) as regards issuing shares in excess of the Disapplication of Pre-emption Authority, officers who knowingly authorised or permitted the contravention are jointly and severally liable to compensate any person to whom a pre-emptive offer should have been made. The amount of compensation due is determined by reference to the loss, damage, costs or expenses that the claimant has sustained or incurred because of the contravention; and

(iii) as regards issuing shares in excess of either of the Authorities, any director who can be shown to have acted in breach of their statutory duties; e.g. the duty to act within their powers and the duty to exercise reasonable care, skill and diligence could theoretically be liable to a shareholder claim for unfair prejudice and a derivative claim for breach of statutory duty.

Given the lack of possibilities provided by law, the number of options open is limited. We also have to bear in mind the obligation to take steps to repay the loan, which means fund-raising by CPO. The possible courses of action are:

1. Write to all holders of the relevant shares asking if they wish to put their shares up for sale to other/new shareholders.

2. Write a Companies Act/Articles of Association letter to the relevant shareholders demanding information with regard to their holding including details of any person they are holding them for etc, and remove the voting rights of any person who fails to respond.

3. Ban the holding of shares in the Company by any person who is an officer of/employed by/connected with the club.

4. Require full disclosure of identity on application for shares including proof of address.

5. Limit the voting rights attaching to a holding of shares, regardless of the number of shares held.

6. Review the issue of shares with regard to process, intention and formality to see if any aspect could lead to a declaration of invalid issue.

None of these is entirely satisfactory, but we are where we are. There is clearly a significant element of bolting the stable door, but we can only take all steps that we are legally and contractually able to do.

We have received a significant number of suggestions, and continue to be open to any suggestion as to how this issue and the question of future issues of shares can be addressed.

Gray Smith.

Please note that the above has been prepared as a report for the Company and its shareholders, but does not constitute legal advice to any person. The matters stated above are believed to represent the position as a matter of fact and law, but no warranty is given to their accuracy. Any person intending to rely on any matter stated above should take independent legal advice before doing so.

The Board would like to thank Gray for the diligence and thoroughness of his inquiry into these important matters. There is a lot to take in. Personally, I would like to draw attention to the very important word 'knowingly' in company law and in relation to the overselling of shares.

I have worked with Bob Sewell for many years and worked with Rick Glanvill, who is well-known to many CFC supporters, for the last six months or so. We have discussed at length the share sales process at the time - during which, don't forget, the previous Board was receiving constant legal counsel.

I would like to put on record that I am convinced that although, as they have already admitted at the AGM, the shares oversale was a serious error, it was not knowingly carried out by them.

I would also take this opportunity to remind shareholders that as a Board we have tried to deliver on promises and requests made to and by you after I returned to CPO.

For example, we have updated and separated the Chelsea Pitch Owners websites, adding new information. We are examining further cost-effective and modernising ideas to improve the communications process.

As you can see, CPO director and lawyer Gray Smith has reviewed and reported on his findings and put forward his recommendation with regards to the sale of shares per the EGM.

We have carried out an extensive review and cleaned up the shareholders register, and are considering options for improving its ongoing maintenance.

We had already suspended the transfer of shares in order to prevent possible misuse. We now have a process in place, and everyone who wishes to transfer shares is required to provide more details, such as their full name, date of birth and address, and proof of address such as a utility bill or passport. The same will apply to any future sales.

The Board has entered into dialogue with Chelsea FC directors and leaders and officials of the London Borough of Hammersmith and Fulham with regard to the redevelopment of Stamford Bridge. We have been as open as possible in passing on details of these meetings to you through our website, and we have urged those we have met to do likewise.

And we are consulting widely on resolutions to be put before you at the CPO general meeting in June. We of course recognise there is much more to be done, and as a Board we are all volunteers with busy lives. However, we believe we are now headed in the right direction together.

Steve Frankham

Chairman, Chelsea Pitch Owners