Golden Cross
18 years ago
Chaparral Resources Buyout Highlights Lukoil's Questionable Tactics
Monday September 18, 11:27 am ET
Thomas Kirchner submits: Russian oil giant Lukoil's attempt to buy out the minority shareholders of Chaparral Resources, Inc. raises serious concerns about shareholder rights and the treatment of outside investors by the first Russian company to list on the London Stock Exchange -- one that claims to be a model for openness and transparency.
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Over the last few years, Lukoil, described by many observers as an extended arm of the Kremlin, has tried repeatedly to expand its operations in Kazakhstan, which it views as strategically important for its vast oil reserves. Last year, it lost the $4.2 billion takeover battle of Canadian PetroKazakhstan to the Chinese National Petroleum Company. In the heat of that fight, it bought another player in Kazakhstan's oil industry, Nelson Resources, and thereby acquired a stake in CHAR, which it eventually raised to a 60% majority. Following its defeat in the PetroKazakhstan saga, Lukoil has taken on an easier target: the minority shareholders of CHAR.
While it is not surprising that Lukoil seeks to consolidate its presence in Kazakhstan, it is the tactics it employs that raise eyebrows among U.S. investors. Minority shareholders have a tough stance anywhere in the world, but when U.S. minority shareholders and a Russian company are involved, two extremes come together. Shareholders would not even know the whole story, had it not come to light through a class action lawsuit against the buyout. Lukoil's managers seem to have been unaware of the remarkable powers enjoyed by plaintiffs in the U.S. to compel the release of internal documents during discovery, as they left an extensive paper trail. Frank Quattrone's infamous e-mail instructing employees to 'clean up' their files sounds harmless and innocent compared to the unambiguous and direct language in documents released through Chaparral's proxy materials.
During the preparation of the 10-K in early 2006, a Lukoil executive instructed Chaparral in internal e-mails to “add something a little negative to the report” and complained that it conveyed a “positive impression” and used “positive words.” To make sure that investors got a negative impression, he also suggested the deletion from a press release of production data that showed growth. In fact, production had been a major drag on CHAR's stock price for a few months, because drilling of new wells had been suspended at the end of 2005 when the lease on the CHAR's only drilling rig on the Karakuduk oil field expired. The field is operated jointly by Lukoil and CHAR. However, the expiration of that lease was caused deliberately by Lukoil, which refused to renew the lease contract, even though the rig's owner kept urging a renewal. The suspension of drilling had the desired effect: CHAR's stock price dropped by more than 23%. Investors were told neither that two new rigs had already been lined up, nor that drilling and production would be accelerated later in the year.
With the stock price depressed artificially, Lukoil made a lowball offer for the shares of CHAR's minority shareholders. Lukoil's initial bid of $5.50 per share was soon raised to the final price of $5.80 when it became clear that this was a level at which one institutional holder was willing to sell. While CHAR and Lukoil were debating whether $5.50 or 5.80 was the right price, CHAR's financial adviser indicated that the value of the firm in the $8-$11 range.
Even though it exploited the Karakuduk field jointly with CHAR, Lukoil executives regarded it
as theirs. In an email, the CFO of CHAR talks of Lukoil's regional director for Kazakhstan, Boris Zilbermints, making “noises” about payments from the oil field to CHAR, which “is letting the minority shareholders receive funds.” Presumably, this is an example of what a CHAR director describes in another email as “the Russian way of doing business.” So are some of the other scare tactics used by Lukoil. It threatened to shut-in the Karakuduk field if no deal were reached, or to cease development or fire the board of directors.
This is not to say that firing the board of directors would have been a bad outcome. A committee of two independent directors had been created to lead the negotiations with Lukoil, as is standard practice in mergers, with a mandate to represent shareholder interests. At least one of the two directors on the committee, however, appears to have had more concern for Lukoil’s interests than for those of shareholders. He leaked the valuation range that CHAR's financial adviser had calculated to Lukoil, so that CHAR was negotiating with a buyer who knew the price range of the seller. The two directors appear to have been well aware of the problematic nature of the buyout, as they negotiated a highly unusual clause in their indemnification agreement: if there is a lawsuit in connection with the merger, they will be paid $300 per hour for time spent defending themselves. In other words, the less they represent shareholders, the longer the lawsuits will be, and the more they get paid.
The big question is: why does Lukoil bother going to such great lengths to strongarm minority shareholders? Chaparral is a $200 million company of which Lukoil owns 60%, so that the buyout is costing a mere $80 million. This is small change for the world's second largest oil company by reserves, which posted net
profits of approximately $1.7 billion in the first quarter alone. Clearly, it could afford to pay fair value if it wanted, without the need to squeeze outside shareholders to the bone.
Lukoil's actions can only be explained by culture. As in many other emerging markets, Russian companies have an appalling record of treating minority shareholders, and Lukoil is exporting this standard to the U.S. market. Add to this a few ambitious regional and divisional managers seeking to impress their superiors with clever financial maneuvering. In a 2003 presentation posted on Lukoil's website, Lukoil's regional management for Kazakhstan boasts of its skill at buying assets low and selling high - they are sure to get top grades in that subject due to their Chaparral dealings.
For any large corporation, it is easy for top executives to tout their firm as a modern, shareholder-friendly company with good governance. But it is much harder to get B and C-level executives to act in that spirit. In Lukoil's case, middle management actively torpedoes the tone set at the top, and sooner or later it will lose any credibility with investors. And it is a mystery how exactly Lukoil intends to build a brand name for its gas stations in the Mid-Atlantic while establishing a reputation of abusing shareholders. What money they save on the CHAR purchase today will not be enough to fix their reputation in the future.
With Lukoil guaranteed to vote its 60% stake at the September 29th shareholder meeting in favor of selling CHAR to itself, the fate of Chaparral's minority shareholders is now in the hands of the Delaware courts. Class action lawsuits are often vilified, but if you are a holder of Chaparral, it is your only shot at getting a fair price for your shares.
Golden Cross
18 years ago
CHAR: The Next Class-Action King
Tara Weiss 06.07.06, 1:00 PM ET
Related Quotes
CHAR 5.76 + 0.01
There’s nothing like a federal bribery and fraud indictment to scare away a law firm’s clients. That’s especially true at Milberg, Weiss, Bershad & Schulman, the class-action giant known for snagging the lucrative lead counsel position in numerous securities lawsuits.
The firm and two name partners are accused of paying kickbacks to plaintiffs in as many as 150 lawsuits. And since its May 18 indictment, Milberg has been losing both partners and clients. Among the defections: institutional clients like the Ohio Tuition Trust Authority and the New York State Common Retirement Fund. Adding to Milberg’s worries is the announcement on June 6 that Delaware’s Office of Disciplinary Counsel is investigating the firm's work in the state.
So which firms are likely to benefit from Milberg’s misfortune? Three years ago, Milberg Weiss was the leader in investor lawsuits, according to Institutional Shareholders Services, a Maryland-based company that tracks all securities class-action litigation for shareholders. Their most recent survey put Milberg Weiss in fourth place behind Bernstein, Litowitz, Berger & Grossman; Barrack, Rodos & Bacine; and Lerach, Coughlin, Stoia, Geller, Rudman & Robbins. Forbes.com called each of Milberg’s top four competitors, but they refused to comment on how they might be wooing Milberg’s former clients.
Each firm stands to gain. But of the three, it’s a toss-up between the industry’s two largest players. Bernstein, Litowitz, Berger & Grossman settled nine cases totaling $3.7 billion. Close. Barack, Rodos & Bacine also had settlements totaling $3.7 billion in five cases. While third-place Lerach, Coughlin, Stoia, Geller, Rudman & Robbins settled 47 cases, it totaled just $1.8 billion. By comparison, Milberg settled 34 cases totaling $600 million.
The indictment may have brought Milberg to its knees, but the company says it’s not yet crippled. “We will vigorously defend ourselves and our partners against these charges, and we will be vindicated,” Melvyn Weiss, one of the firm’s co-founders, said in a statement on the company’s Web site.
Despite how overly optimistic that may sound, even the firm’s competitors aren’t counting Milberg out. “They’re like cockroaches; they’re highly adaptable,” says John D. Lovi, a securities defense attorney and managing partner at Steptoe and Johnson's New York office, who frequently sparred with Milberg Weiss’ attorneys. “Unless this firm is destroyed by this investigation and this case, I think they will continue to be a dominant player in the field.”
It’s a field that’s notoriously cutthroat, despite attempts to temper the competition. The most recent effort was 1995’s Private Securities Litigation Reform Act. Prior to its passage, plaintiffs raced to the courthouse to be the first to file a lawsuit against a company if its stock dropped. Backroom jockeying determined who the lead plaintiff would be, a significant role since that attorney divvied up the winnings.
The Reform Act changed that. Now, the plaintiff who owns the most stock takes the lead role. But firms such as Milberg have allegedly found a way around that. State controllers decide where institutional investors put their money and which law firms represent them. Those are the same firms that make campaign contributions to state comptrollers, raising the question: Do comptrollers recommend firms to represent their states based on how much money was donated to their campaign?
That may be debatable, but New York State Comptroller Alan Hevesi received $100,000 from Milberg Weiss for his 2002 campaign and $13,500 from Melvyn Weiss and senior partner William Lerach. (Lerach left Milberg in 2004 and formed his own firm in California.)
“These types of contributions aren’t illegal; it’s a practice that’s under fire,” says Bruce Carton, vice president of shareholder services at Institutional Shareholder Services. “In a perfect world, that decision making would not be affected by political donations.”
Others that stand to gain from Milberg’s predicament are firms that represent members of the classes that didn’t initially hold lead status. That’s because the indictment leaves room for attorneys in class-action cases to lobby the court to unseat them as lead plaintiff. Those attorneys are likely to argue that Milberg was made lead counsel based on its reputation and because it follows the rules of the court. Now, all of that is in question.
The indictment is already affecting Milberg’s notorious ability to gain lead status. Last month, a Delaware judge denied the firm the lead counsel role in a case that involves Russia's largest oil producer, OAO Lukoil Holdings (other-otc: LUKOY - news - people ), and its proposed takeover of Chaparral Resources (otcbb: CHAR.OB - news - people ), a Kazakhstan subsidiary.
And last week Ohio Attorney General Jim Petro appointed Cincinnati firm Waite, Schneider, Bayless & Chesley to represent the Ohio Tuition Trust Authority in its case against the Putnam American Government Income fund. New York’s Hevesi is going to appoint a replacement in the New York State Common Retirement Fund class action against Bayer AG (nyse: BAY - news - people ).
Much has been made about the similarities between Milberg Weiss and the fall of accounting behemoth Arthur Anderson. But we’re not likely to see the demise of securities class-action suits. There’s simply too much competition out there. Plus, there’s already speculation that several attorneys from Milberg will form their own firm.
“If they were to disappear tomorrow, I doubt very little would change,” says Joseph Grundfest, a professor at Stanford University Law School and former Securities and Exchange commissioner. “The same companies would be sued, the same causes of action would be pursued.”
Napolion
19 years ago
==>CHAR ALL TIME HIGH: @$3.06 from $1.94. TARGET $10.00... Chart is a thing of beauty: 1st support at $2.83, secondary very strong support at $2.55, previous all time high of $2.99 taken out yesterday...
http://stockcharts.com/def/servlet/SC.web?c=char,uu[h,a]dacayyay[pb50!b200!d20,2!f][vc60][iUc15!Ua12....
The Chinese are looking at buying Petro companies in Kazakhstan, such as PKZ and presumably NLG.TO, CHAR's big brother/joint partner and they're paying top price, as evidenced by their offer for Unocal...
Next Q for release in August should show about .14 after .10 in Q1 and will seal the fate of CHAR's share price: estimated EPS for 2005 is .54 compared to .30 in 2004, reflecting increased output from 8,500 barrels/day to 12,500 barrel/day in December 2005 and higher prices. On the basis of a conservative PE of 20, we obtain at the end of 2005 a projected price of:
.54 x 20 = $10.80
Of course, this is just the beginning, as further development will bring total output to over 15,000 barrels/day in 2006 and the life of the field is at least 10 years without further discoveries...
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