The board of directors of Kazakstan's state oil and gas company KazMunaiGas (KMG) has proposed a revision to its relationship agreement with production company KazMunaiGas Exploration Production (KMG EP),  whose GDRs are traded on the LSE, which would lead to KMG “restoring appropriate control” over KMG EP. If KMG EP’s board agrees, then minority shareholders will get to vote on the proposal at a 26 January 2016 extraordinary general meeting, Moscow-based Sber-CIB investment bank said in a note on November 17.

All shareholders would be entitled to sell their shares at “an agreed premium” to the average share price over the last 30 days ($6.99 per GDR, close to the November 13 closing price of $7.00 per GDR). “We believe the premium will be determined in discussions between the independent directors of KMG and KMG EP,” the note suggested.

“The existing relationship agreement establishes an arms-length interaction between the two companies, something that KMG now apparently wants to do away with, although there is no clarity on what exactly the revisions would entail,” the bank said. “KMG claims that running the companies in the integrated manner would allow it to ‘support’ KMG EP in addressing challenges that stem from the dropping oil price. However, we note that these challenges ensued in part because KMG EP sells crude to NC KMG refineries at below the cost of production, something that KMG EP’s BoD has failed to vote on either way.”

If shareholders approve the changes to the agreement, then all minority shareholders will be eligible for the buyback, which will be conducted within a 60-day period. In effect, KMG EP’s shareholders would be protected from downside to the current price thanks to the buyback.

However, a change in the relationship agreement that leads to even greater control by KMG over the affairs of KMG EP could severely limit minority shareholders’ upside. For instance, KMG may be able to sell assets to KMG EP at elevated prices without the approval of the independent board members, the note suggested.

Sber-CIB said it was sceptical of the revisions and suggested minority shareholders should contact KMG EP’s independent directors to make sure “they negotiate an acceptable set of revisions”. “However, we are also aware of the danger that could occur if NC KMG were to fail to get its way; it may ‘punish’ minority shareholders, for instance by cancelling the dividend.”

“If KMG’s BoD is really preparing for an IPO, as it says in a letter to KMG EP, then this latest move would be a bit of an inauspicious start for corporate governance at a future listed company,” the Moscow-based investment bank concluded.