Companies Act 2006

The Companies Act 2006 requires the Company to set out in this report the development and performance of the business of the Group during the financial year ended 31 December 2011, including an analysis of the position of the Group at the end of the financial year, and a description of the principal risks and uncertainties facing the Group.

Principal activities

British American Tobacco p.l.c. is a holding company which owns, directly or indirectly, investments in the numerous companies constituting the British American Tobacco Group of companies. The principal subsidiaries and associates are listed on the principal subsidiary and associate undertakings pages. All subsidiary undertakings are involved in activities directly or indirectly related to the manufacture, distribution or sale of tobacco and nicotine products.

Group results and dividends

The Group results are addressed fully in the financial statements and in the Directors’ report: business review. The Board recommends to shareholders a final dividend of 88.4p per ordinary share of 25p for the year ended 31 December 2011. If approved by shareholders at the Annual General Meeting to be held on 26 April 2012, the dividend will be payable on 3 May 2012 to shareholders registered on either the UK main register or the South African branch register on 9 March 2012, the record date. The ex-dividend trading dates are 5 March 2012 on the JSE Limited (JSE) and 7 March 2012 on the London Stock Exchange (LSE). As the Group reports in sterling, dividends are declared and payable in sterling except for shareholders on the branch register in South Africa whose dividends are payable in rand.

A rate of exchange of £:R = 12.19960 as at 21 February 2012 (the closing rate for that date as quoted on Bloomberg), results in an equivalent final dividend of 1,078.44464 SA cents per ordinary share.

From the commencement of trading on 23 February 2012 (the date of the preliminary announcement) to 9 March 2012 (inclusive), no removal requests between the UK main register and the South African branch register (in either direction) are permitted. Further, from the close of business on 2 March 2012 until the close of business on 9 March 2012 (inclusive), no transfers between the UK main register and the South African branch register are permitted and no shares may be dematerialised or rematerialised between 5 March 2012 and 9 March 2012, both days inclusive.

Further details of the total amounts of dividends paid in 2011 (with 2010 comparatives) are given in note 8 on the accounts.

Share capital

As at 31 December 2011, the Company had an allotted and fully paid share capital of 2,025,986,670 ordinary shares of 25p each with an aggregate nominal value of £506 million (including treasury shares and shares owned by the employee share trusts).

Purchase of own shares

The Board reinstated its on-market share buy-back programme following the Company’s Preliminary Announcement on 24 February 2011and under the authority granted by shareholders in 2010. At the 2011 Annual General Meeting, the Company was given authority to purchase up to 199,400,000 of its ordinary shares. The minimum price that may be paid for such shares is 25p and the maximum price is an amount equal to 105 per cent of the average of the middle market prices shown in the quotation for an ordinary share as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which the ordinary share is contracted to be purchased.

During the year ended 31 December 2011, the Company made on-market repurchases totalling 28,037,708 of its own ordinary shares, representing 1.4 per cent of the issued share capital (excluding treasury shares) as at 31 December 2011 and at a value of £750 million, excluding transaction costs. In accordance with the Company’s policy, all of these repurchased shares are held as treasury shares and as at 31 December 2011 the number of treasury shares was 56,997,762. While treasury shares are held no dividends are paid on them and they have no voting rights. Treasury shares may be resold at a later date.

The present authority for the Company to purchase its own shares will expire at the 2012 Annual General Meeting where it is proposed that the Company’s authority to purchase its own shares is renewed. This will enable the share buy-back programme to continue for a further year. In the opinion of the Directors, the exercise of this authority is likely to result in an increase in the Company’s earnings per share and will be in the interests of its shareholders generally. Details of the applicable resolution and explanatory notes are contained in the Notice of Annual General Meeting which is sent to all shareholders and is also published on www.bat.com.

Significant agreements – change of control

The following significant agreements contain certain termination and other rights for our counterparties upon a change of control of the Company.

On 7 August 2007, British American Tobacco Mexico, S.A. de C.V. (as borrower) and the Company, B.A.T. International Finance p.l.c. and B.A.T. Capital Corporation (as guarantors) entered into a term credit facility arrangement with Barclays Capital (as mandated lead arranger), HSBC Bank plc (as agent) and certain financial institutions (as lenders) pursuant to which the lenders agreed to make available to the borrower US$690 million to refinance existing facilities and for general corporate purposes (the Facility). Pursuant to the Facility, should the borrower cease to be a direct or indirect subsidiary of the Company, the borrower shall immediately repay any outstanding amounts. Where there is a change of control in respect of the Company, the lenders can require all amounts outstanding under the Facility to be repaid.

On 10 July 2009, British American Tobacco Tütün Mamulleri Sanayi ve Ticaret Anonim Sirketi (as borrower), the Company and B.A.T. International Finance p.l.c. (as guarantors) entered into a term credit facility agreement with Barclays Bank PLC (as agent) and certain financial institutions (as lenders) pursuant to which the lenders agreed to make available to the borrower €700 million to refinance existing facilities and for general corporate purposes (the Facility). In December 2010, the borrower prepaid €250 million of the outstanding amount. Pursuant to the Facility, should the borrower cease to be a direct or indirect subsidiary of the Company, the borrower shall immediately repay any outstanding advances. Where there is a change of control in respect of the Company, the lenders can require all amounts outstanding under the Facility to be repaid.

On 25 November 2010, the Company, B.A.T. International Finance p.l.c. and British American Tobacco Holdings (The Netherlands) B.V. (as borrowers and, in the case of the Company, as a borrower and guarantor) entered into a revolving credit facility agreement with HSBC Bank plc (as agent) and certain financial institutions (as lenders) pursuant to which the lenders agreed to make available to the borrowers £2 billion for general corporate purposes (the Facility). Pursuant to the Facility, should a borrower (other than the Company) cease to be a direct or indirect subsidiary of the Company, such borrower shall immediately repay any outstanding advances made to it. Where there is a change of control in respect of the Company, the lenders can require all amounts outstanding under the Facility to be repaid.

Details of the change of control provisions contained in the Company’s Long-Term Incentive Plans are given in the remuneration report.

Contractual arrangements

Individual operating companies in the Group have contractual and other arrangements with many third parties in support of the Group’s business activities including those covering input materials (filter tow, tobacco leaf and wrapping materials), logistics and distribution and information technology. Such contracts and arrangements may be deemed to be essential to one or more operating companies but there are no contracts or arrangements considered to be essential to the operation and understanding of the business or the Group as a whole.

Creditor payment policy

Given the international nature of the Group’s operations, there is not a global standard code for the Group in respect of payments to suppliers. In the UK, the operating subsidiaries have signed up to the Better Payment Practice Code under which each company undertakes to: (1) seek agreement on payment terms with its suppliers at the outset of each transaction; (2) explain its payment procedures to its suppliers; (3) pay bills in accordance with the agreed terms and all legal requirements; and (4) inform suppliers without delay when contesting an invoice and settle disputes quickly. Details of the Code are available on the website, www.payontime.co.uk.

Non-UK operating subsidiaries are responsible for agreeing terms and conditions for their business transactions when orders for goods and services are placed, ensuring that suppliers are aware of the terms of payment and including the relevant terms in contracts where appropriate. These arrangements are adhered to provided that suppliers meet their contractual commitments.

Creditor days have not been calculated for the Company as it is an investment holding Company and had no trade creditors at 31 December 2011.

Intra-Group pricing

The prices agreed between Group companies for Intra-Group sales of materials, manufactured goods, charges for royalties, services and fees are based on the normal commercial practices which would apply between independent businesses.

On behalf of the Board

Nicola Snook
Secretary
22 February 2012
British American Tobacco p.l.c.

Registered in England and Wales No. 3407696