Patience Paid for Shareholders in Lukoil Litigation

Jan.22.08 | About: PJSC Lukoil (LUKOY)

Russian oil giant Lukoil’s (OTCPK:LUKOY) buyout of the minority shareholders of Chaparral Resources, Inc. has been marred by allegations of serious wrongdoing and fraud that came to light during discovery in shareholder litigation, which we wrote about in September 2006. More than one year later, Lukoil has agreed to settle the litigation by paying over $36 million to the former shareholders of Chaparral Resources.

Readers of this blog will recall Lukoil’s carefully planned strategy of depressing Chaparral Resources stock in order to buy the publicly held shares below fair value for $5.80 at a steep discount to the value of $8-11 estimated by Chaparral’s own financial adviser. Lukoil was embarrassed to see its disregard for minority shareholders become public when internal documents were revealed in the litigation. For example, Boris Zilbermints, Lukoil’s regional director for Kazakhstan, complained about payments from the oil field to Chaparral, which “is letting the minority shareholders receive funds.”

The settlement of the ensuing litigation amounts to $36.7 million, from which up to $13.4 million in legal fees and expenses will be deducted. After all, Russian translations, overseas depositions and sifting through thousands of emails are not cheap. One group of funds (SISU Capital Fund and SISU Capital Fund II) holding 1.3 million shares opted out of the class action and preferred appraisal rights instead. They will receive almost the same terms as the public shareholders.

The net settlement available for public shareholders should come to $1.80 per share, give or take a few cents. The gross amount represents a cool 45% increase over the original $5.80 price, and the net still represents a 31% extra payment. Eligible to receive it are only shareholders who held Chaparral stock at the closing of the merger in September 2006. Anyone who sold before the closing is out of luck. Patience paid off.

We are not sure why Lukoil didn’t simply pay full value in the first place. It would not only have spared them significant legal expenses and management time, but also prevented a fair amount of reputational damage. We can’t help but repeat our previous conclusion: robber capitalism.

The settlement will be placed into an escrow account. Lukoil was supposed to fund the escrow on January 15, but “screwed up the mechanics” of the transfer, as a person involved with the case put it. The account is scheduled to be funded on January 22, and Lukoil will have to pay interest due to the delay.

In addition, the settlement is still subject to court approval. Because an agreement has been reached between shareholder plaintiffs and Lukoil, this should happen within the next 3-5 months. The lawyers have asked the court to schedule the next hearing for March 13th. While shareholders wait for their payment, the escrow account will earn interest, which will also be distributed to shareholders.

Stay tuned, we will post updates on any significant developments.

Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund [PAEDX], which owned shares in Chaparral Resources, Inc. through the closing of the merger.