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Kazakhstan|opinion & analysis|December 5, 2014 / 05:25 PM
Shareholder of Kazakhstan Kagazy necessitates improvement of corporate governance

AKIPRESS.COM - Kazakhstan Kagazy The need to improve corporate governance in publicly traded companies has been highlighted by a row erupted at London-listed Kazakhstan Kagazy following allegations from a shareholder that members of the board of directors have abused their positions for a financial gain.

Corporate governance troubles at Kazakhstan Kagazy

By Nurlan Aibekov, a freelance journalist

Kazakhstan Kagazy is Central Asia’s largest producer of paper, corrugated board and packaging as well as one of the region’s leading operators of commercial warehousing and industrial infrastructure facilities. It is also the only internationally listed Kazakh company that carries the name of the country in its name.

Despite its strong market position the company has not been financially successful as Kazakhstan Kagazy made a total loss of US$113.7 million in 2013 according to its full-year results. Its market value plummeted from approximately $525 million at the time of its IPO in the summer of 2007 to around $8 million in April 2014 when it suspended trading on the London Stock Exchange.

According to the allegations of a shareholder, Jos Van Lent, made in his open letter to shareholders and the Chairman of the Board of Kazakhstan Kagazy, the financial difficulties did not prevent the Board from rubber-stamping the purchase of $7.9 million worth of company’s shares from a member of the Board and former Chairman John Khabbaz and his farther-in-law through their investment vehicle Phoenician Capital.

The letter points out that Kagazy agreed to purchase its own shares at a price of $0.30 per share, while its share price was as low as $0.10 when the payment was made on 10 January 2014, and the highest price had only reached $0.19 during 2013. Jos Van Lent said in the open letter that no minority shareholders were offered an opportunity to participate in the buy-out in a violation of market rules.

“I believe it to be unacceptable that the company made an offer to one group of shareholders only, and particularly a Director and his connected parties, at a significant premium to the market price of the shares,” commented Jos Van Lent. His letter also claims that, in addition to purchasing Kagazy’s shares from Phoenician Capital, the Board compensated it to the tune of $480,000 for “directly attributable” transaction costs. It took Kazakhstan Kagazy almost 11 months to inform the market about the transaction which was “roughly equal to the then entire market share of the company,” continues Jos Van Lent.

According to Jos Van Lent who says he is also a former employee, this incident is not a single violation of corporate governance in the company. The letter lists a number of conflicts of interest amongst Non-Executive Directors who continued to hold their highly paid roles, while also receiving substantial payment for the provision of services to Kagazy through related parties. The law firm Zaiwalla&Co earned $2.3 million in fees from Kagazy in 2013 after Sarosh Zaiwalla, its senior partner, was appointed non-executive director at Kagazy in May 2013. The letter also names other non-executive director Denise Valentine and Chairman Sir Tony Baldry as having conflicts of interest in their roles at Kagazy.

The letter also points out that the Board has also been “exceptionally generous” to top management, quoting the company’s Annual Report. While the company’s loss increased in 2013, top managers’ compensation grew from $1.3 million to over $2 million of which $1.1 were bonuses.

“When I first became acquainted with the Company around nine years ago, I strongly believed that Kagazy had great potential to perform well in the Kazakh market and subsequently became a shareholder. I have, however, recently become deeply disillusioned with the actions of the Board, which are in clear violation of the UK Corporate Governance Code on a number of counts, and are certainly not in the best interests of shareholders,” concluded Jos Van Lent in his open letter.

Click to read the Open Letter to Shareholders of Kazakhstan Kagazy (334,81kb)

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