Mikus Buls May 29 2002 Privatization of Latvian Shipping Company Gets Underway Ellex | Corporate Finance/M&A - Latvia Mikus Buls Corporate Finance/M&A Corporate Background Privatization Regulation Privatization Vouchers Sale of LSC Shares to Employees and Pensioners Sale of Shares at the Stock Exchange for Cash Pension Budget Shares Reserve Shares Unsold Shares Rights and Obligations On January 18 2002 the board of directors of the Latvian Privatization Agency approved the final version of the Privatization Regulation of the Latvian Shipping Company (LSC). This decision was in turn based on the Terms of Privatization of LSC, adopted by the Cabinet of Ministers on December 18 2001, and recommendations of the Riga Stock Exchange. Through this decision, the last stage of privatization of one of the largest state monopoly enterprises has commenced. This phase began in 1995 and was intended to be completed much sooner, but was delayed due to disagreement on the most suitable approach for the privatization. Corporate BackgroundLSC is the largest shipping company in the Republic of Latvia. It undertakes international water transportation of cargo and passengers, and supplies other related services. In terms of the volume of shipped cargo on the market, the LSC tanker fleet is the fifth largest in the world and the largest in Northern Europe. It has a share capital of Lats200 million, and its profit in 2001 totalled Lats16.7 million (about $26.1 million). LSC commenced operations on September 13 1991, after taking over 87 vessels from the Soviet commercial fleet which were registered in Latvian ports. Privatization RegulationOver 2 million shares are to be privatized, with each share having a par value of Lat1. LSC will be privatized along with all of its investments. The land under the buildings and constructions which are owned by LSC will not be transferred for privatization. However, if this land is eventually privatized the owner of the buildings and constructions will have the right of first refusal. The Privatization Regulation provides that LSC will be privatized as follows: 51% of the share capital will be sold at the Riga Stock Exchange; 32% of the share capital will be sold through public share offerings for privatization vouchers; 6% of the share capital will be sold to LSC employees and pensioners; 10% of the share capital will be transferred to the State Special Pension Budget; and 1% of the share capital will constitute the privatization reserve.Privatization VouchersThe sale of the first portion of shares commenced one month after the Privatization Regulation's approval. As of February 18 2002 purchasers could apply for 32% of LSC's shares, to be sold for vouchers by public offering. The Law on Joint Stock Companies requires that a joint stock company must have at least 50 shareholders in order to qualify as a public joint stock company. This provision was used as an argument for selling shares in exchange for vouchers prior to their sale at auction for cash. LSC's status as a public joint stock company is the precondition for commencement of the sale of shares at auction on the Riga Stock Exchange. As the result of the public offering for vouchers, LSC is likely to have a large number of shareholders, thus ensuring that the legal requirements are already fulfilled before the preparatory arrangements to be made prior to the sale of shares at auction are completed. Previous draft privatization plans for LSC provided for the concurrent organization of both these stages of sale. Privatization vouchers for which shares are purchased at this and subsequent stages of the privatization process are dematerialized securities which are issued by the state, and which may be used only once as the means of payment for the state or municipal property in privatization. Vouchers were introduced when the privatization programme commenced after Latvia regained its independence, and were granted to: Latvian residents, based on the period of time they were resident in Latvia; the former owners of nationalized or otherwise illegally confiscated property or their heirs; and politically repressed persons.Before the privatization of LSC commenced, approximately 15 million vouchers held by Latvian residents were outstanding and had not yet been used for the privatization of state or municipal property. The government recognized that the sale of LSC shares for vouchers was a partial solution to the problems arising from unused vouchers. Common shares were offered at the public offering. The shares were not divided into classes: all shares confer equal rights and each share carries one vote. All purchasers who have opened voucher accounts were entitled to purchase shares, with some exceptions. Those purchasers who have offered to purchase the shares for the auctioned price or more will be deemed to have acquired the shares. The remaining shares will be proportionally distributed among those purchasers who have offered to purchase the shares at the auctioned price. The public offering for privatization certificates has now closed, and on April 25 2002 an extraordinary meeting of the Privatization Agency's board of directors approved the results of the sale of this portion of LSC shares. Shares have been acquired by a total of 5,567 bidders. The majority of these shares were acquired by Hansabanka (13.51%) and Latvijas Krajbanka (13.28%). Hansabanka has acquired 0.23% of the shares for its own needs, while about 26% of the total shares were acquired by both banks on behalf of their clients. However, the names of these clients have not yet been disclosed. The auctioned price of one share at this stage of the privatization procedure was Lats1.11. Sale of LSC Shares to Employees and Pensioners On February 18 2002 the sale of shares to employees and pensioners also commenced. These shares were also sold for vouchers and their par value is Lats1. These shares carry voting rights. These shares can be acquired by LSC employees and by pensioners whose last employer was LSC and whose uninterrupted length of service prior to retirement was not less than one year. The number of shares that may be purchased depends on the employee's length of service. Sale of Shares at the Stock Exchange The majority of LSC's shares will be sold for cash at the Riga Stock Exchange. Following the approval of the Privatization Regulation, the Riga Stock Exchange will make preparations for this sale, including: performing due diligence; performing an evaluation of LSC which takes account of the due diligence results, and on the basis of which the maximum and minimum sale price per share will be determined; preparing the sale prospectus; preparing information on LSC and the markets in which it operates for distribution among the privatization candidates, including roadshow materials for the largest local and foreign investors; and summarizing the comments submitted in relation to the share bid.Prior to the Privatization Regulation's approval, the Cabinet of Ministers took a different approach to the sale of the common package of shares. Initially, 15% of LSC's shares were to be sold at public offering in exchange for privatization vouchers, while 68% were to be sold for cash at the Riga Stock Exchange. The remainder were to be distributed in the same way as under the final Privatization Regulation.Opinions differed as to the best approach. Another option proposed was to offer 75% of shares to a strategic investor and sell the remaining 25% by public offering in exchange for privatization vouchers. In the earlier stages of LSC's privatization attempts were made to attract one strategic investor, although without success. However, if the potential strategic investor had availed of this opportunity, the remaining 25% of the shares could have lost their importance, as their influence on the decision-making process would have been severely limited.Following the road shows for investors, and before the public circulation of the shares, LSC will convene a general shareholders meeting which will approve the Charter of the Private Company of LSC. The charter will then be submitted to the Commercial Register for registration. As of the date of registration, LSC will be deemed to be established and operating as a private company, in which the state has an equity holding.Once LSC has been registered as a private company in the Commercial Register, the Riga Stock Exchange will have 20 days in which to collate the share purchase orders, determine the sale price of shares and identify the persons who have purchased the shares. This information must subsequently be approved by the Privatization Agency's board of directors. Shares will be deemed to have been bought by those purchasers who have bid the highest price for them and undertaken to perform other privatization obligations. Pension Budget SharesThe 10% of shares allocated to the Pension Budget will be transferred without compensation to the State Special Pension Budget following a general meeting of LSC, to be convened one week after the results of the sale at the Riga Stock Exchange are approved. Reserve Shares These comprise directors' reserve shares which LSC will purchase from the Privatization Agency, and the remaining reserve shares which shall be used as employee shares and publicly offered shares. The directors' reserve shares are common shares, but do not carry voting rights. Unsold Shares Unsold employee shares and shares which remain unsold following the public offering will be sold together with the unused reserve shares for cash by public auction at the Riga Stock Exchange, pursuant to a special decision of the Privatization Agency. Rights and Obligations Once privatized, LSC shall assume all the rights and obligations of its predecessor. It must retain the profile of activities and a specified number of employees. LSC must also implement an investment policy in accordance with the Privatization Regulation, remain located and registered in the Republic of Latvia, and retain the name 'Latvijas Kugnieciba'. For further information on this topic please contact Filip Klavins or Mikus Buls at Klavins & Slaidins by telephone (+371 703 5222) or by fax (+371 703 5252) or by email ([email protected] or [email protected]).