Arthur Zurabyan evaluated the prospects of contesting the repurchase price of EDC shares from minority shareholders in light of sanctions

The major shareholders and management of Eurasia Drilling Company (EDC) increased their offer, from USD 10 to USD 11.75 per share, to buy out the 17.5 percent of the shares in the hands of minority shareholders, reported EDC. A special meeting of the shareholders to approve the deal is scheduled for 13 October. To accept the offer, it is necessary to get a two-thirds majority, and the owners of about 71 percent of the shares already have agreed, the report said. Delisting may take place on 18 November.

At the end of 2014, the company’s founder, Alexander Japaridze, controlled 31 percent of the company, while Alexander Putilov had the remaining 22.7 percent. At the moment, 30 percent of EDC is trading on the London Stock Exchange (LSE). A source close to one of the parties involved in the transaction noted last week that all shares are expected to be bought.

On 30 September, EDC announced that the merger with Schlumberger had failed. A week later, the main owners decided to delist, and the minority shareholders received the first offer to buy their shares at USD 10 per share. A special committee, which included the independent directors of EDC, Earl Patrick Clanwilliam, Alexander Shokhin, and Igor Belikov, along with their advisers, Renaissance Capital and Willkie Farr & Gallagher, revised the price. EDC noted that the new price was 7.3 percent higher than the share price, at the close of trading on Friday, and it was 19.9 percent higher than the average price since the announcement of the failed transaction with Schlumberger. On Monday, 18.00 MSK EDC shares on the LSE rose by 9.4 percent to USD 11.38 per GDR. At first, EDC was valued at USD 1.46 billion, requiring USD 440 million for redemption. Now, the estimate increased to USD 1.71 billion, and about USD 520 million are required for redemption.

When the company becomes private, it will be easier to manage, a source close to one of the parties said. This could set the stage for the subsequent sale of EDC or a part of it, according to analysts at Gazprombank.

Nevertheless, some minority EDC holders consider the proposal unfair, since Schlumberger was going to pay nearly twice as much for the company’s shares–USD 22 per GDR. The Financial Times (FT) quoted Jacob Grapengisser, a partner of the East Capital investment company, and William Scholes, from Aberdeen Asset Management (included in the top ten minority holders of EDC, according to Bloomberg), both of whom oppose the deal at this price. According to Scholes, even Schlumberger’s proposal was low.

Both EDC and the minority shareholders are disappointed with the failure of the Schlumberger transaction, especially in today’s difficult market conditions, a representative of EDC said. He also noted that, because of Schlumberger’s proposal, EDC’s stocks traded at their highest prices since the beginning of the year.
Grapengisser and two other minority shareholders said that investors likely will contest the offered price in court. Under the laws of the Cayman Islands, where EDC is registered, the minority shareholders are unable to block the deal, but they may try to get a fair price. “A very large part of the financial community in Moscow is disappointed with this proposal,” Grapengisser remarked. “I called on other major minorities, and they are not very happy.” East Capital recently won a court battle, in a similar case, against Integra, another Russian oil services company registered in the Cayman Islands, Grapengisser said.

Should litigation take place, the court will have to assess the actual economic impact of the sanctions, in relation to the value of the company, noted Arthur Zurabyan, the head of the International Practice of ART DE LEX. Their implementation came after Schlumberger’s proposal, which also does not take into account the latest negative changes on the stock and commodity markets. Thus, the court’s decision may depend on the political situation, observed Zurabyan. Given the current political realities, he concluded, the decision likely will favor the minorities.