FUTURE OF RELATIONSHIP AGREEMENT BETWEEN KMG NC AND KMG EP
KMG NC has requested that a revised Relationship Agreement should be considered and endorsed by shareholders of KMG EP at an EGM in January. KMG NC understands that a revised RA may be considered a relevant change to the basis on which shareholders invested and therefore proposes that if they are able to receive endorsement of a revised RA at an EGM in January, KMG NC would support a buyback of shares from any shareholder who wishes to sell their equity within a 60 day period, (i.e. until 26 March 2016).
KMG NC is today publishing the full text of the letter that was sent to KMG EP to ensure that all shareholders in KMG EP have the same information about the proposals.
The full text of the letter sent on 9 November is:
Dear Mr. Hopkinson,
KMG EP's recent Q3 results have highlighted again the scale of the challenges that the company faces in a very difficult economic environment.
As the majority 63% shareholder, the performance of KMG EP has a significant impact on KMG NC, and we want to support KMG EP in addressing the current challenges in the most effective way possible. We believe this means restoring appropriate control of KMG EP to KMG NC. This would give KMG EP the benefit of the wider Group's expertise and experience in key areas, reduce duplication, improve focus and decision making, and significantly reduce cost.
The barrier to this is the current Relationship Agreement [RA] that governs interaction between KMG NC and KMG EP.
This was put in place at the time of IPO to safeguard the interests of minority shareholders, and we have been strong and consistent supporters of it. We believe however that in its current form the RA is now actively detrimental to the interests of minority shareholders, as it stands in the way of the support that KMG EP needs from KMG NC.
We therefore believe that the RA now urgently needs to be revisited, not least in the light of a significantly changed external operating environment and the fact that a number of significant terms fall away in 2015, and therefore require attention to ensure that there is a transparent commercial understanding upon which minority shareholders can base their investment decisions.
Revising the Relationship Agreement
The RA gives an important role to the INEDs so we would ask the KMG EP INEDs to engage in a constructive dialogue with KMG NC INEDs over a revised RA. Given the urgency of the situation and the importance of giving KMG EP and its shareholders clarity over the future direction of the company, we believe that these discussions should be concluded swiftly, and in any case within 60 days.
As time is of the essence, given that key provisions expire at the end of 2015, we propose also to ask that your Board calls an EGM for 26th January to consider the outcome of the discussions on the RA and to endorse a revised RA.
We believe that the interests of all shareholders will be best served by a RA which will allow NC to exercise appropriate control, reflecting the size of our shareholding, and recognizing the embedded state of KMG EP within the KMG Group of companies with simpler, more cost effective decision making, allowing for lower operating costs.
For itself, KMG NC intends to retain the highest standards of corporate governance to continue to protect the interests of minority shareholders.
Changed circumstance for minority shareholders
We recognize that a revised RA may be considered a relevant change to the basis on which shareholders invested.
We therefore propose that if we are able to receive endorsement of the revised RA on this basis at the EGM in January, KMG NC would support a buyback of shares from any shareholder who wishes to sell their equity within a 60 day period, (i.e. until 26 March 2016). The price basis would be an agreed premium over the undisturbed average share price of the last 30 days, (i.e. from 10 October to 9th November 2015).
As you know, the IPO of KMG NC has already been announced. Shareholders who support the revised RA would be invited to register an interest in being considered for a priority allocation of shares in KMG NC's forthcoming IPO. Such shareholders would also be entitled to inclusion in the priority even if they choose to sell their current equity within the 60 days following the EGM decision.
Clearly if we are not able to agree a revised RA, then we would not be able to support a buyback or priority at this time. In this scenario, we will continue to work with KMG EP to try to improve the company's performance and enable the company to realize the objectives set out at IPO, notably on exploration and economic production growth.
We are circulating this letter to all Board members, and would ask that you also copy it to all shareholders.
I hope we can engage swiftly to resolve these issues and move forwards to build a stronger KMG Group together.
Yours sincerely,
Frank Kuijlaars
Chairman
JSC KMG NC
Note:
KMG NC, Central Asia's largest oil and gas company, is Kazakhstan's national oil and gas company in exploration, production, refining and transportation of hydrocarbons. The Company accounts for 27% of oil and 14% of gas production in Kazakhstan and is one of the country's largest employers, with approximately 80,000 employees. The average production in 2013 was 573.8 kboed of crude oil with a strong refinery throughput of 323.6 kboed and proven reserves of 8.7 bnboe. The Company represents the Government's interests in the oil and gas sector and is 100% owned by "Samruk-Kazyna" JSC, Kazakhstan's sovereign wealth fund. Through joint ventures KMG NC has equity in 38 oil & gas related companies in Kazakhstan and abroad.
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