These Frequently Asked Questions (FAQs) have been prepared to help investors with questions relating to the Exchange Offers announced in November 2009 and the Retail Holdings Offer announced in December 2009.
| Q | What were the Exchange Offers? |
| A | At the beginning of November 2009, certain Lloyds Banking Group companies invited eligible holders of certain securities with a par value of £1000 or more to exchange their securities for either ordinary shares or alternative securities, called Enhanced Capital Notes (ECNs), in each case together with an amount in cash based on the annual coupon or dividend rate on the relevant securities and the period between the last coupon or dividend and the date of their exchange. The Exchange Offers closed on 20 November 2009. |
| Q | What was the Retail Holdings Offer? |
| A | On 15 December 2009, Lloyds Banking Group invited holders who held certain securities with a par value of less than £1000 to exchange them for cash, including an amount in cash based on the annual dividend rate on the relevant shares and the period between the last dividend and the date of their repurchase. |
| Q | Why was the offer document (the Exchange Offer Memorandum) for the Exchange Offers not available in hard copy? |
| A | It is standard practice for companies not to mail out such documents in hard copy form, due to the size of the document and the time constraints that exist on printing large numbers of copies of a document of this size. The Exchange Offer Memorandum was, instead, made available online. |
| Q | Why was the Exchange Offer Memorandum so complicated? |
| A | The Exchange Offer Memorandum had to meet certain form and content requirements prescribed by law. The prospectus was approved by the FSA as a retail prospectus and contained both summaries of the Exchange Offer process and of the terms of the new securities on pages 7-12 and 96-103 respectively and a Chairman's letter explaining the commercial background to the proposals. |
| Q | What could I have obtained under the Exchange Offers? |
| A | Eligible holders could offer to exchange their securities for a new type of security, an ECN, or for ordinary shares; in each case, together with a cash sum. |
| Q | Why was the period in which to respond so short? |
| A | The exchange offer was open for a period of 17 days; this is longer than is customary for an exchange offer of this type. It was also the maximum period that the offer could have been held open prior to the general meeting of Lloyds Banking Group, which was required to approve the rights issue and exchange offers. |
| Q | Why was there a requirement to have access to a Euroclear or Clearstream Account to receive ECNs on settlement? |
| A | It is not possible on issues of certain securities for some securities of the class to be settled though the Euroclear and Clearstream systems and other securities of the same class to be issued in individual holders’ names and to be held outside these systems. The vast majority of holders held their securities through the Euroclear and Clearstream systems and therefore it was considered appropriate for the Exchange Offers to use these systems. However Lloyds Banking Group recognised that some holders of securities would not have personal accounts with Euroclear and Clearstream and therefore it was recommended to such holders that they seek assistance from a broker. In order to address concerns that some brokers did not have access to Euroclear or Clearstream accounts, Lloyds Banking Group helped to facilitate a further arrangement whereby the CREST accounts of those brokers could be utilised in the offer. The communication of this arrangement was managed through the correct processes within CREST to ensure that all brokers who are relevant CREST participants received the message in the usual industry way, which also enabled Lloyds Banking Group to introduce this arrangement swiftly. An RNS announcement was also made to the market via the London Stock Exchange. In the documents sent to holders, Lloyds Banking Group urged holders to seek advice from a financial adviser or broker; those advisers should all have been aware of the availability of CREST as a settlement option. |
| Q | What were the exchange priorities? |
| A | The series of securities which were included in the Exchange Offers were placed in two orders of priority (the exchange priorities), one dealing with the exchange for ECNs and cash and the other for ordinary shares and cash. Those securities placed towards the top of the relevant exchange priority were exchanged before those securities placed further down. |
| Q | Why were my securities not accepted for exchange? |
| A | Individual circumstances may vary, however, in general, applications were not accepted due to either issues with the application form or as a result of the exchange priorities. Some applications may have been rejected as the registrars did not receive the relevant holder’s offer form until after the close of the offer period, whilst other forms, which were received within the offer period, were rejected as they were incorrectly completed. Further, when Lloyds Banking Group announced the exchange priorities at the start of the Exchange Offers it could not know how many holders would offer to exchange their securities, or how many securities of each class would be offered for exchange. Commercial factors and regulatory capital requirements were considerations in deciding how many new securities would be issued in the Exchange Offers and, as a result of the high take up rates, not all securities offered for exchange could be accepted. |
| Q | Why were my shares so far down the exchange priorities? |
| A | A balanced approach between the ordinary share and ECN exchange priorities was established, with 'may pay' tier 1 securities being preferred over 'may pay' upper tier 2 securities in the ordinary share exchange priority, and vice versa on the ECN exchange priority. The securities were then primarily ordered by call date, although the overarching objective for Lloyds Banking Group in establishing the exchange priorities was to be rational and fair. Lloyds Banking Group sought to balance this with the goal of making the Exchange Offers successful. |
| Q | Did you favour institutional investors over individual holders? |
| A | The overarching objective was to be rational and fair. The aims of the Ordinary Share and ECN exchange priorities were to maximise the participation of holders in the Exchange Offers and institutional investors were not favoured over individual holders. |
| Q | Why are you no longer paying a dividend or coupon on my securities? |
| A | As a consequence of Lloyds Banking Group obtaining state aid from the UK government, the European Commission has required Lloyds Banking Group to agree to make a number of commitments which include, during a restricted period from 31 January 2010 to 31 January 2012, ceasing to make coupon and/or dividend payments on certain hybrid capital securities. |
| Q | How are you able legally to stop paying me a dividend or coupon on my securities? |
| A | The terms of certain securities state that interest or dividend payments are optional or discretionary. To meet the commitment required by the European Commission the directors must exercise their discretion and not make payments which they are not legally obliged to make. This is not a breach of the terms of those securities. However, on certain securities, interest payments that are not made accrue and may be paid to holders in the future. There is no promise that payments of arrears of interest will be made. To determine whether this applies in your case, you should consult the terms of your particular securities, which are available at: |
| Q | Are all the preference shareholders not supposed to be treated the same? |
| A | In accordance with the Articles of Association of Lloyds Banking Group, each series of preference shares has been issued as a separate class. Although the preference shares are expressed to rank equally in liquidation, they do not rank pari passu in all respects. For instance, in respect of coupon rates and payment dates, the classes of preference shares are different and on a purchase by tender, as in the Exchange Offer, Lloyds Banking Group is not required to select the preference shares to be purchased in any particular manner as between the holders of the same class of preference shares or as between the holders of different classes. |
| Q | I have heard that you have to pay a dividend on my preference shares as long as certain shares issued in 2004 are in existence. Are you not breaking a contract with me? |
| A | Dividends on the Lloyds Banking Group preference shares are all discretionary. A dividend is only payable if the Board of Directors, in its discretion, decides that a dividend will be declared, even when distributable profits are available for distribution. Certain preference shares contain a provision that Lloyds Banking Group will not, during a period when no dividend has been declared on those preference shares, pay a dividend on the '2004 shares'. As no dividend has been or will be paid on the '2004 shares' until after the end of the EC moratorium, the obligation has not been broken. |
Please note that we are unable to advise you in relation to your individual tax status. If you remain unsure, you should contact HM Revenue and Customs (HMRC) or your tax adviser for further assistance.
| Q | What has happened? |
| A | In certain instances a voucher was sent out in connection with the payment certain preference shareholders received. This stated that the voucher would be accepted by HMRC as evidence of a tax credit and indicated the amount of such tax credit. The voucher was incorrect. Although one of the components of the payment received was an amount in cash based on the annual dividend rate of the relevant preference shares and the period between the last dividend and the date of their repurchase, this amount was not a dividend. In most cases, the relevant preference shareholder will not be entitled to any tax credit in respect of the cash amount paid on the repurchase of the relevant preference shares. |
| Q | How does this affect me? |
| A | If you have prepared and submitted your tax return on the basis of the tax voucher, you may need to resubmit your return. If you remain unsure, you should contact HMRC or your tax adviser, who will be able to help you with correcting your tax return. |
| Q | I don’t complete a tax return, does this still affect me? |
| A | We are unable to advise you in relation to your individual tax position and, if you remain unsure, you should contact HMRC or your tax adviser for further assistance. |
| Q | What do I need to do now? |
| A | If you have already filed your tax return, you may have misreported your tax position. If you remain unsure, you should contact HMRC or your tax adviser for further information. |
| Q | Do I owe you or HMRC money? |
| A | You don’t owe Lloyds Banking Group any money in relation to these shares. We are unable to advise you in relation to your individual tax position, but, if you remain unsure, you should contact HMRC or your tax adviser for further assistance. |
| Q | Am I owed money? |
| A | Lloyds Banking Group does not owe you any money in relation to these preference shares. The correct value was paid to you either directly into your mandated bank account or in the form of a cheque. Lloyds Banking Group is unable to give you an opinion in relation to your individual tax position, but, if you remain unsure of your tax position, Lloyds Banking Group would advise you to contact HMRC or your tax adviser for further assistance. |
| Q | Will I be penalised by HMRC for this mistake? |
| A | Individuals should only be subject to a penalty by HMRC where inaccuracies in a tax return are deliberate or careless on their part. HMRC considers each tax return individually and determines whether to impose a penalty and the amount of that penalty on a case by case basis. If you remain unsure, you should contact HMRC or your tax adviser for further assistance. |
| Q | Will you compensate me for any penalty I am required to pay? |
| A | HMRC considers each tax return individually and determines whether to impose a penalty and the amount of that penalty on a case by case basis. If HMRC imposes a penalty, we will consider individual claims for compensation on a case by case basis. |
| Q | How did this happen? |
| A | We are working to understand how this administrative error arose and to ensure that robust measures are put in place to minimise the risk of it happening again. |
| Q | How many people has this affected? |
| A | The Rights Issue and Exchange Offers were part of a large-scale exercise to allow as many investors as possible to exchange their securities. Within that context, there have been very few complaints. |
| Q | Who can I speak to about my concerns? |
| A | Should you have any further queries about the tax voucher mailing, please contact our registrars, Equiniti, on the following number 0800 030 4189 (or, if telephoning from outside the UK, on telephone number +44 121 415 0080)* or at the following address Equiniti Corporate Actions, Aspect House, Spencer Road, Lancing West Sussex BN99 6DA. |
* Calls to +44 121 415 0080 from outside the UK are charged at applicable international rates. Different charges may apply to calls made from mobile telephones and calls may be recorded and monitored randomly for security and training purposes. The helpline is open 8.30am to 5.30pm on Monday to Friday, excluding public holidays.
Preference share
A preference share is a share in a company which gives rights to receive a dividend in certain circumstances, as well as the right to receive the principal amount of the share back in preference to certain other shareholders if the company is wound up.
Dividend
As regards the preference shares, a dividend is a fixed amount of money which, if declared at the discretion of the company, is paid at a fixed date or dates throughout the year. The amount of the dividend is fixed by reference to an interest rate and the principal amount of the relevant preference share.
The difference between a dividend payment and a distribution
A dividend payment is a type of distribution. A dividend payment is treated differently, in terms of the information which needs to be provided for tax purposes, from other types of distributions.
Tax credit
A tax credit broadly reflects the fact that at least some tax has been paid at company level before the profits are distributed. A distribution by a UK company generally carries a tax credit equal to one-ninth of the net distribution.
Tax voucher
A tax voucher is another name for a tax certificate, which a company has a duty to provide by law if a distribution consisting of a dividend is made. A tax certificate is a written statement showing the amount of the dividend paid, the date of the payment and the amount of the tax credit to which the holder would be entitled in respect of the dividend.
Tax return
Please see the HMRC website at www.hmrc.gov.uk/sa/index.htm for further information.
The difference between capital gains and income tax
Please see the HMRC website at www.hmrc.gov.uk/ for further information.
