Results of independent review into disclosure around previous transactions and unauthorised payments
London, 13 October 2014
Afren plc ("Afren" or the "Company") announces today that Willkie Farr & Gallagher (UK) LLP ("WFG") has completed its independent review into certain transactions undertaken by the Company and whether such transactions should have been announced at the time they were entered into in accordance with the requirements of the Listing Rules.
The key findings were:
· There were two instances of the Company failing to comply with its reporting obligations under the Listing Rules
· A further transaction entered into that was subject to the investigation was not required to be disclosed
· There has been no material loss to the Company as a result of these transactions
· These three transactions were connected to the issues raised in the unauthorised payments review
· As previously announced, unauthorised payments were received by the CEO Osman Shahenshah and COO Shahid Ullah and two Associate Directors, Iain Wright and Galib Virani
· A further seven current and former employees also received payments
The Board believes that neither of the Partners involved in these transactions were aware of any wrong-doing.
In response to these findings the Company has:
· Notified the FCA of these breaches of its Listing Rule obligations and will make the full report available to the FCA
· Decided to terminate the employment and directorships of the CEO and COO for gross misconduct
· Decided to terminate the employment of the Company's two Associate Directors with immediate effect
· Commenced disciplinary actions against the additional employees involved in the receipt of unauthorised payments
· Instructed counsel to commence legal proceedings to recover sums in respect of unauthorised payments
· Resolved to take actions to enhance the effectiveness of the Group's internal reporting and controls
· Reaffirmed its commitment to maintaining the highest standards of corporate governance and will look to strengthen the Board
Commenting today, Egbert Imomoh, Executive Chairman of Afren plc, said:
"The decisive and comprehensive actions we have set out today should leave no-one in any doubt about how seriously Afren takes the issues uncovered in July and our commitment to rebuild the confidence of shareholders, partners, staff and our other stakeholders. Our focus is now on delivering the significant opportunities we have before us with an open and transparent approach to our business based upon mutual respect, the highest standards of ethics, governance and business conduct."
For further information contact:
Bell Pottinger (+44 20 7861 3232)
Group Head of Investor Relations
Afren plc (+44 20 7864 3700)
Notes to Editors
Afren is an independent upstream oil and gas exploration and production company listed on the main market of the London Stock Exchange and a constituent of the Financial Times Stock Exchange Index of the leading 250 UK listed companies. Afren has a portfolio of assets spanning the full cycle E&P value chain. Afren is currently producing from its assets in Nigeria and holds further interests in the Kurdistan region of Iraq, Ghana, Côte d'Ivoire, Congo Brazzaville, Kenya, Ethiopia, Madagascar, Seychelles, Tanzania and South Africa. For more information please refer to www.afren.com.
The following summarises the outcome of the reviews prepared by WFG.
The original scope of the review was to determine whether three transactions that took place in 2012 and 2013 should have been classified as class 2 transactions under the Listing Rules and disclosed as such to the market at the time of the transactions. Whilst the transactions with both Oriental and AMNI are legitimate and have not in overall terms resulted in any material loss by Afren, they are connected to issues raised in the unauthorised payments review.
First agreement with Oriental Energy - July 2012
In July 2012, Afren agreed to advance $100 million to Oriental Energy Resources Limited ("Oriental") (the "First Oriental Agreement"). The contractual documentation was drawn up on the basis that the payment was, in effect, an advance purchase of Oriental's oil from Ebok. The First Oriental Agreement was structured by Mr Shahenshah to avoid disclosure under the Listing Rules, and therefore the payment was made in two tranches. $93m was initially paid on 4 July 2012, representing just under 5% of Afren's then market capitalisation. A further $7m was paid on 25 July 2012 following an increase in Afren's share price. It was intended that the second tranche when aggregated with the first tranche would not exceed 5% of Afren's market capitalisation and in any event that the transaction would be treated as being of a revenue nature in the ordinary course of Afren's business and therefore would not be announceable.
The Company did not consult its sponsor at such stage to determine whether the First Oriental Agreement was required to be announced pursuant to chapter 10 of the Listing Rules. The Company did consider its announcement obligations under the Disclosure and Transparency Rules and determined that the First Oriental Agreement did not give rise to inside information such as would require an announcement.
However, when the second payment of $7m was made an incorrect aggregation test was applied by Mr Shahenshah, despite seeking external legal advice at the time which did not identify his error, albeit the advice was not from the Company's normal Listing Rules advisers. If correctly aggregated, the combined advance represented approximately 5.3% of the Company's market capitalisation.
When the aggregation mistake was identified, further advice was taken from the same external counsel and the transaction was discussed with the Company's sponsor. Mr Shahenshah indicated to the Company's sponsor that he had received legal advice that the transaction was in the ordinary course of Afren's business and that it was of a revenue nature.
Based on Mr Shahenshah's assertions, the Company concluded that the transaction was in the ordinary course of business, namely the practice of making advances to Oriental recoverable from Oriental's share of production from the relevant block was within the ordinary course of business (as regards arrangements between Afren and Oriental) and the practice of funding Oriental in this way constituted matters of a revenue nature.
As a consequence of Mr Shahenshah's determination on the nature of the First Oriental Agreement, no announcement was made by the Company in July 2012 in respect of the First Oriental Agreement.
WFG's review has concluded that the determination of the First Oriental Agreement as being a transaction of a revenue nature in the ordinary course of business was incorrect. The true nature of the First Oriental Agreement was not, in reality, an agreement for the prepayment of oil, nor was it a way of funding Oriental's costs in developing Ebok in a manner which might be considered to be in the ordinary course of business. It was a loan of $100 million to Oriental and was included in Afren's balance sheet for 31 December 2012 under the line "prepayments and advances to partners". Accordingly it was neither in the ordinary course nor of a revenue nature and should have been announced as a class 2 transaction on 25 July 2012 once the second tranche of $7 million was paid.
The First Oriental Agreement was amended in August 2013 as part of the Amendment Agreement referred to below such that Oriental agreed to repay the $100 million in monthly payments of $10 million. During 2014 Oriental has repaid approximately $90 million of the $100 million advanced. Afren expects to recover $100 million in full by the end of 2014.
Second agreement with Oriental Energy - August 2013
On 23 August 2013, Afren Resources Limited ("ARL") and Oriental entered into an agreement (the "Amendment Agreement") to amend the Ebok Joint Operating Agreement (the "JOA"). The material terms of this Amendment Agreement were that ARL agreed to pay Oriental $300 million in return for ARL acquiring the rights to certain tax allowances and increasing ARL's share of oil revenues from Ebok. The Amendment Agreement was conditional on pioneer status being confirmed for Ebok, which occurred in October 2013. The $300 million was paid in two installments. $180 million was paid in August 2013 in advance of pioneer status being confirmed and $120 million was paid in November 2013.
On the instructions of Mr Shahenshah, the focus of the Company's commercial discussions was on ensuring that the terms of the Amendment Agreement were deemed to be in the ordinary course of business, such that the amendments and the underlying transaction would not be announceable. In making this determination, the Company also placed reliance upon the determination by Mr Shahenshah that the First Oriental Agreement had been a transaction of a revenue nature in the ordinary course of business. As such, it was considered that similar amendments to the Ebok JOA (such as those contemplated in the Amendment Agreement) would equally be treated as being in the ordinary course of business and therefore not subject to any announcement.
As the Company's commercial team had made a determination that the Amendment Agreement was in the ordinary course of business, the Company considered that chapter 10 of the Listing Rules did not apply. Accordingly, the Company did not consult with its sponsor prior to entry into such agreement, although the Board believed that their advice had been taken.
However, the Listing Rules provide that the FCA may determine that a transaction is not in the ordinary course of business because of its size or incidence. While the Company was relying upon the nature of the Amendment Agreement as being similar to the First Oriental Agreement, no separate consideration was given to the size and incidence of such transaction. As the value of the Amendment Agreement represented approximately 12.1% of the Company's market capitalisation at the time of entry, the sponsor should have been consulted to determine whether due regard should have been given to the size of the transactions, which were the subject of the Amendment Agreement.
WFG's review has concluded that the determination of the Amendment Agreement as being in the ordinary course of business was incorrect. For this purpose the correct interpretation of the Amendment Agreement was in part a further loan to Oriental to be repaid out of oil revenues of $180 million from Ebok and $120 million to acquire certain tax allowances. WFG concluded that the $180 million loan was not in the ordinary course of ARL's business and exceeded 5% of Afren's market capitalisation.
Furthermore, whilst the payment of $120 million to amend the Ebok JOA to clarify that the treatment of certain tax allowances was in the ordinary course of Afren's business, WFG concluded that such payment had to be aggregated with the $180 million payment under the Listing Rules, bringing the transaction to approximately 12.1% of Afren's then market capitalisation. Therefore, the $180 million and $120 million payments and the Amendment Agreement should have been announced as Class 2 transactions.
Afren has received repayment of the $180 million and has reflected the value of the tax allowances in its 2013 accounts.
Amendment of Production Sharing and Technical Services Agreement with AMNI - December 2013
In December 2013 AMNI International Petroleum Development Company Limited ("AMNI"), Afren Energy Resources Limited ("AER"), Afren and Okoro Limited entered into a number of agreements to resolve a dispute regarding the economic benefits each was receiving from Okoro. The dispute arose as a result of a difference in tax rates in Nigeria paid by Afren and AMNI. Pursuant to a resolution agreement (the "AMNI Resolution Agreement") AER agreed to pay $100 million (together with interest of $9 million due under AMNI's facility with the United Bank of Africa plc as referred to below). As part of the resolution of the dispute, an amended and restated production and technical services agreement (the "Amended PSTSA") was entered into. AER agreed to pay the $100 million in installments. However, in order to access the full $100 million immediately, AMNI entered into a loan agreement with United Bank of Africa plc ("UBA") and Afren issued a bank guarantee to the value of $70 million to UBA in respect of AMNI's financial obligations to UBA (the "AMNI Guarantee").
Afren took advice at the time from both its sponsor and its external legal advisers on whether the transactions needed to be announced. Based on the information provided, they did not advise that it had to be announced.
WFG has concluded that the AMNI Resolution Agreement and the Amended PSTSA could be argued to be in the ordinary course of Afren's business and therefore did not need to be announced. WFG also concluded that whilst the AMNI Guarantee was not entered into in the ordinary course of Afren's business, it was below the thresholds which required announcement as a Class 2 transaction or otherwise.
WFG has concluded that in October 2013 Mr Shahenshah and Mr Ullah entered into an agreement with Oriental by which Oriental agreed to pay 15% of the agreed net cash flows that Oriental was due to receive from Ebok for the period 2013 to 2017 to a British Virgin Islands special purpose vehicle, Ntiti Limited ("Ntiti BVI"), in exchange for facilitating $400 million in funding by Afren to Oriental. Ntiti BVI is owned and/or controlled by Mr Shahenshah and Mr Ullah. For 2013, Oriental has already paid $45 million, or 15% of the $300 million provided to it under the Amendment Agreement to another Ntiti entity incorporated in Bermuda ("Ntiti Bermuda") by arrangement with Ntiti BVI. Mr Shahenshah and Mr Ullah, with assistance from Afren's former Nigeria Business Development Manager, Mr Faiz Imam, used the funds in part to pay extraordinary bonuses to themselves ($17.1 million in total was paid to Mr Shahenshah and Mr Ullah), and to other selected employees of Afren. The bonuses were ostensibly to ensure the retention of key employees of Afren for Oriental projects. In total eleven current and former Afren employees, including Mr Shahenshah and Mr Ullah, benefited from these extraordinary payments from Ntiti Bermuda. WFG has seen no evidence to suggest that this arrangement was ever discussed with the Afren Board. Both Mr Shahenshah and Mr Ullah have admitted the receipt of the payments referred to above, although they initially denied that this arrangement had been entered into.
With respect to the AMNI Resolution Agreement and Amended PSTSA, WFG's report sets out evidence to suggest that, in exchange for assisting AMNI in raising the necessary funding for a December 2013 management buy-out ("MBO") of AMNI, including by persuading Afren to pay $100 million to AMNI as a "tax equalisation" settlement in December 2013, Mr Shahenshah and Mr Ullah intended to obtain a personal benefit from the transaction, most likely by obtaining equity in the company which was incorporated to acquire AMNI as part of the MBO. Both Mr Shahenshah and Mr Ullah have denied that they have obtained any benefit from the transaction. WFG has seen no evidence to suggest that this benefit was ever discussed with the Afren Board.
The WFG review report includes certain recommendations to the Company and the Board to improve the effectiveness of Afren's corporate governance arrangements. While the Company has in place appropriate controls and procedures, certain members of senior executive management elected to not comply with them. The Board is committed to ensure this attitude is eradicated.
The Board is currently reviewing such recommendations and is considering as to how to best implement them. The Directors will also seek to strengthen the Board and improve the Company's internal management and reporting controls.
WFG has finalised its review on all principal allegations raised and WFG expects that its remaining ancillary work will be completed within the next few weeks.
This information is provided by RNS