Delta

Question 1

When is approval of the Competition Agency required?

Answer 1

For any acquisition (i) of more than 25% of the voting shares of an entity (ii) where the “turnover threshold” or the “asset threshold” is met (this is approx. USD21,865,000).

Question 2

Give details of the Previous Transfer of Shares.

Answer 2

At the time of incorporation, the Company was held by Dostybayev (58%) and Nurmukhamedov (42%).

In November 2010, Dostybayev transferred 51% to Idrossov, and Nurmukhamedov transferred 22% to Ablazymov, at KZT10,000 per share.

In Febrary 2011, Nurmukhamedov transferred 9% to Idrissov, 8% to Ablazymov and 3% to Dostybayev, at KZT10,000 per share.

Question 3

What is the general statutory limitation period, and the limitation period for tax and environmental claims?

Answer 3

The general statutory limitation period is 3 years.

The limitation period (i) for tax claims is 5 years from the end of the respective tax period; and (ii) for environmental claims is 1 year for administrative code fines and 3 years for general civil liability.

Question 4

What are “large transactions” and “related party transactions”?

Answer 4

A “large transaction” is a transaction with a value at least 25% of the company’s assets.

A “related party transaction” is a transaction between a company and its affiliate.

Both “large transactions” and “related party transactions” require corporate approvals.

“Large transactions” also require (i) evaluation by a locally licensed appraiser and (ii) notification to the company’s creditors (by way of publication in mass media) within 5 business days of the relevant board approval.

Risk: Unwinding / Claw-back

Question 5

Describe a currency operation?

Answer 5

When a foreign company: (i) acquires 10% or more of the shares in a Kazakhstani company; and (ii) the purchase price payable for such shares exceeds USD500,000, such transaction will be deemed to be a currency operation and must be registered with the NBK.

Question 6

What are the transactions in Delta that require (i) MOG consent and (ii) State waiver of its pre-emption right?

Answer 6

(i) The Transaction
(ii) The September 2011 and December 2011 transfers - NB: Seen
(iii) The Previous Transfer of LLPs

NB: Not the Previous Transfer of Shares because the Company didn’t have Oil and Gas Activities at the time of transfers.

Question 7

What are the transactions in Delta that require spousal consent?

Answer 7

(i) The Transaction
(ii) The Previous Transfer of Shares - NB: Seen for all - Ablasymov not married at that time.
(iii) Arguably during the capitalization of the Company in September 2010 for payment of the charter capital (seeking to see this in RFI)

Question 8

When is there a need to make a mandatory offer to remaining shareholders?

Answer 8

When a person (acting alone or with its affiliates) acquires 30% or more of the issued and paid-up shares of a company on the secondary market, such person must within 30 days of the acquisition make an offer to the remaining shareholders to purchaser their shares. The offer must be published in the mass media, and contain information about the purchaser and the proposed purchase price for the shares. If an existing shareholder accepts the offer, the purchaser must pay the shares offered by such existing shareholder within 30 days after that existing shareholder accepts the offer.

NB: In Delta, Idrissov and Ablazymov acquired 60% and 30% of the shares in November 2010 and February 2011 respectively. Thus they must have made an offer to the remaining shareholders to purchaser their shares.

Question 9

How did the Company eventually acquire the Subsoil Use Contracts and Licenses? Describe the various transactions, when they occured and the consideration involved.

Answer 9

(i) The LLPs were acquired from OrdabasyMunaiGas JSC in September 2011 for USD 168,000,000 (we are awaiting confirmation in the RFI of whether the purchase price was paid – the Sellers indicated in the RFI that relevant proof of payment was added in the dataroom but we didn’t see the documents);
(ii) The Subsoil Use Licenses and Contracts were transferred from the LLPs to the Company in December 2011 for USD 1,273,300 (we saw evidence of payment of the purchase price);
(iii) The LLPs were sold to Rysbayev for USD400,000.
* Da Chief - Da No Cum - Razors*

Question 10

When is one required to notify the National Bank of Kazakhstan and the Company?

Answer 10

When a person (acting alone or with its affiliates) intends to acquire 30% or more of the shares in a Kazakhstani company on the secondary market.

NB: Thus the November 2010 and February 2011 acquisitions by Idrissov and Ablazymov respectively of 60% and 30% of the shares of the Company required the prior notification of the NBK and the Company.

NB: The Transaction requires such notification.

Question 11

What is the conversion rate?

Answer 11

150 KZT (Kazakhstan Tenge): 1 USD

Question 12

What are the various loans given by the Company?

Answer 12

(i) Several interest free loans to Idrissov in the total amount of USD6m.
(ii) Loan to Maksat LLP in the total amount of approx. USD1m - financing provided by way of the Company paying debts of Maksat LLP owed to third party creditors and acquiring rights of third party creditors for the amount of debts so paid - Maksat LLP must repay the debt to the Company no later than 31 December 2013.
(iii) A number of interest-free loans to 9 of its employees in the total amount of approx. USD300,000 - these loans should be repaid by December 2012.

Question 13

What are the potential “preferential transactions” in Delta?

Answer 13

(i) The December 2011 transfer of the Subsoil Use Licenses / Contracts to the Company may be a preferential transfer (i) in the event bankruptcy proceedings are initiated against the LLPs within 3 years of the acquisition of the Subsoil Use Licenses / Contracts; and (ii) if the Subsoil Use Licenses / Contracts were transferred at a price below the market price This creates a risk of unwinding.
(ii) The September 2011 transfer of the LLPs from OrdabasyMunaiGas JSC to the Company may be a preferential transfer if bankruptcy bankruptcy proceedings are initiated against the OrdabasyMunaiGas JSC within 3 years of the acquisition of the LLPs; and (ii) if the LLPs were transferred at a price below the market price This creates a risk of unwinding.

Liquidating the LLPs removes the risk of any unwinding.

Question 14

What are the potential consents and approvals required for the Previous Transfer of LLPs?

Answer 14

(i) MOG consent
(ii) State waiver of pre-emption right
(iii) Approval of the Competition Agency
(iv) Potentially “large transactions” and/or “related party transactions”

Question 15

Where is the registered office of the Company, as well as any representative offices or branches?

Answer 15

Originally, the Company has its registered office in Almaty, and has a branch in Atyrau City and a representative office in Astana City.

Subsequently, we learnt that it relocated its registered office to Atyrau City.

Question 16

Give details of all fines received by the Company.

Answer 16

(i) Administrative fine received on 25 February 2012 in the amount of approx. USD53,164 for excess emissions from 3 different furnances - the Company appealed to the Atyrau administrative court on 17 January 2013 and lost.
(ii) Administrative Penalty dated 3 October 2007 issued by the State Ecological Inspector of Atyrau oblast to JV Matin LLP for illegal environmental emissions during burning of associated gas - amounted to approx. USD5,701 - Sellers claim that the fine is paid but didn’t provide proof of payment.

Question 17

Describe attempts by the current shareholders to drain the Company of cash.

Answer 17

(i) As of end 2011, the Company had net income of approx. USD92m out of which approx. USD35m were approved for distribution as dividends to the shareholders - the distribution of dividends was approved on 9 December 2012 but we are unsure if the dividends were actually paid.
(ii) On 29 November 2012, the company’s board of directors approved payment of bonuses to certain employees of the Company (including the shareholders Idrissov, Ablazymov and Dostybayev) who actived in their capacity as Counsel, President and Vice-President respectively) in the total amount of approx. USD3.85 - we are unsure if the bonuses were actually paid.

Question 18

Describe the shareholding of the Company.

Answer 18

Paid-in capital of KZT80,000,000 divided into 8000 shares with par value of KZT10,000 each.

Idrissov: 60%

Ablazymov: 30%

Dostybayev: 10%

Question 19

What are the Subsoil Use Contracts / Licenses that have local content requirements?

Answer 19

Kara-Arna (Company to sell 15% to domestic refineries) and Eastern Kokarna (Company required to sell 20% to domestic refineries).

None for Matin.

Failure to comply with local content requirements gives MOG the right to claim a default and charge a penalty of 30% of the value of the relevant non-performed (or improperly performed) commitments.

Question 20

Who is the President, Vice-President and Counsel of the Company? What are the employment terms of the President and of the Vice-President?

Answer 20

Counsel: Idrissov

President: Ablazymov (approx. USD20,000 per month)

Vice-President: Dostybayev (approx. USD16,700 per month)

NB: However, pursuant to a resolution of the board of directors, the President was changed to Rashid Agiuiyev with effect from 1 January 2013.

Question 21

What are the default notices and any potential instances of non-compliance?

Answer 21

(i) Default Notice - From the Ministry of Energy and Mineral Resources (predecessor of MOG) - illegible date - claiming that Arnaoil LLP failed to fulfil its obligations under the Eastern Kokarna Subsoil Use Contracts - doesn’t specify what obligations have not been fulfilled - gave Arnaoil 10 days for submitting explanations and 1 month for curing the breaches - the Company in the RFI says that all breaches herein have been cured.
(ii) Default Notice - From the MOG dated 25 December 2010 requesting Arnaoil LLP to cure a number of breaches on the training of personnel in 2008 and 2009.
(iii) Acts of State Inspections - carried out by the local departments of the regulators - the Ministry of Energy and Mineral Resources (predecessor of MOG) and the Ministry of Industry and New Technologies (MINT) between 1 March 2012 and 20 March 2012 with respect to Matin - requested the company to develop and approve a number of documents (reserves report, new development project document, scheme of production and well operations, program of underground waters monitoring - awaiting confirmation from sellers.
(iv) Acts of State Inspections - carried out by the local department of the Ministry for Emergency Situations in 2009, 2010 and 2011 with respect to the operations of JV Matin LLP and Arnaoil LLP - requested to cure a number of breaches (e.g. breaches of safety rules for electric works, safety rules for well protection, absense of technical manuels for oil production and transportation) - awaiting confirmation from sellers.
(v) Acts of State Inspections - Operations of Arnaoil LLP inspected by the prosecutor office of the Zhylyoi district of Atyrau city in 2008 - reveals a number of breaches for procurement of goods, works and services and training of personnel - Arnaoil LLP provided explanations but such explanations remain unclear.
(vi) An order of the Emergency Department was issued to the Company on 24 September 2010 - For violation of the requirement to have its dangerous manufacturing personnel trained and checked for knowledge on safety rules - Requirement not fulfilled during inspection of 28 April 2011 when an untrained personnel was temporarily dismissed under further confirmation of training.
(vii) Oil spill at Kara-Arna

Question 22

What does the liquidation of the LLPs aim to resolve?

Answer 22

The liquidation of the LLPs removes the risk of any claw-backs described at (i) and (ii) below, as well as any risk of the Company being held liable for the debts of the LLPs as described at (iii).

(i) If bankruptcy proceedings are initiated against OrdabasyMunaiGas JSC within 3 years of the transfer of the LLPs to the Company in September 2011, and the transfer was carried out at a price below the market price, there would be a claw-back of the LLPs.
(ii) If bankruptcy proceedings are initiated against the LLPs within 3 years of the transfer of the Subsoil Use Contracts / Licenses to the Company in December 2011, and the transfer was carried out at a price below the market price, there would be a claw-back of the Subsoil Use Contrats / Licenses to the LLPs.
(iii) The LLPs had paid dividends to the Company in the amount of approx. USD 159 million. If bankruptcy prooceedings are initiated against the LLPs, the Company could be held liable for the debts of the LLPs on the basis that the LLPs became bankrupt because the Company stripped the LLPs of substantial portion of their assets by way of distribution of dividends.

Question 23

What are the expiry dates of the Subsoil Use Contracts / Licences for each of the Oil and Gas Fields, as well as that of their respective underlying work programs?

Answer 23

(i) Matin: 13 October 2020 as indicated by Sellers - BM Almaty originally calculated this to be June 2021 (Work Program doesn’t match - until 2012)
(ii) Kara-Arna: 19 February 2023 (Work Program matches)
(iii) Eastern Kokarna: 2028 according to Sellers - BM Almaty originally calculated this to be 2030 (Work Program until 2028 - matches)

Question 24

What are the documents provided on litigation?

Answer 24

Only one claim was provided. The “Fire Safety Department of Atyrau Oblast of the Fire Safety Committee of the Ministry for Emergencies of the Republic of Kazakhstan” demanded the prohibition of the exploitation of tank battery at Matin due to violations of fire safety rules - Claim was heard on 6 September 2007 - Court partially allowed the claim by prohibiting the use of the piston pumping facilities at Matin until all fire safety rules are complied with and gave the Company 5 days for remedying all existing violations.

Question 25

What other “suspicious” positions do the current shareholders of the Company hold in other companies?

Answer 25

(i) Idrissov is the chairman of the board of directors of the JSC Ordabasy Corporation;
(ii) Ablazymov is the President of OrdabasyMunaiGas JSC;
(iii) Dostybayev is the Vice-President of OrdabasyMunaiGas JSC.

Question 26

What is the real property of each of the deposits?

Answer 26

(i) Matin: Leased 2 land plots (from the local executive authorities of the Kyzylkoga district of Atyrau region)
(ii) Eastern Kokarna: Leased1 land plot (from the local executive authorities of Atyrau region)
(iii) Kara-Arna: Owns 2 land plots and leased 8 land plots (from the local executive authorities of Atyrau region)

Question 27

What are the “large transactions” and “related party transactions” in Delta?

Answer 27

(i) The September 2011 transfer of the LLPs from OrdabasyMunaiGas JSC to the Company - “large transaction” and “related party transaction” for the Company and OrdabasyMunaiGas JSC.
(ii) The December 2011 transfer of the Subsoil Use Contracts / Licenses from the LLPs to the Company - “related party transaction” and arguably a “large transaction” for the Company.
(iii) The Previous Transafer of LLPs could potentially “lage transactions” and/or “related party transactions”.

NB: The Transaction isn’t a “large transaction” (i) for SIPC because SIPC isn’t a Kazakhstani company; and (ii) for the Sellers because they are individuals.

Question 28

What are the transactions in Delta that require approval of the Competition Agency?

Answer 28

(i) The Transaction
(ii) The Previous Transfer of Shares - NB: But this was not seen even though the thresholds were met, perhaps because they were intra-group transfers?

[Query: Buy the December 2011 transaction was for a value of USD1.27million which didn’t exceed the USD22million threshold for competition approval?]

(iii) The September 2011 and December 2011 transfers - NB: Seen for September 2011 transfer, but not seen for December 2011 transfer because intra-group transfer and thus exempt.
(iv) The Previous Transfer of LLPs - Maybe?

Question 29

What are the details of the ATF Loan?

Answer 29

The Company obtained financing from ATF Bank through a non-revolving credit line of USD100,000,000 pursuant to a framework credit agreement, under which the which the parties entered into a definitive loan agreement. The ATF Loan is secured by: (i) a pledge of 100% of shares of the Sellers in the Company granted by its 3 shareholders under 3 separate pledge agreements; and (ii) a pledge of money standing in the Company’s bank account in the total amount of not less than USD115,000,000 pledged by the Company itself. Under the 3 pledge agreements, the transfer of the shares of the Company requires the consent of ATFBank JSC.

Question 30

What are the details of the loan (i) by Idrissov to the Company; and (ii) by the Company to Idrissov? What other financing transactions involve Idrissov?

Answer 30

(i) Idrissov provided an interest free loan of approx. USD26m to the Company (through loan agreement dated 27 August 2011 - Company’s legal department head verbally confirms that this is paid).
(ii) The Company provided several interest free loans in the total amount of approx. USD6m to Idrissov in 2012. A substantial part of the loan (i.e. USD5m) is repayable within 1 year from the date of the loan, but we ware unsure when the loan was actually provided.
(iii) Under a loan agreement dated 28 August 2012, Idrissov borrowed approx. USD20m from ATFBank. On the same date, the Company issued a guarantee in favour of ATFBank guaranteeing due and proper performance by Idrissov of his obligaitons to ATFBank under such loan. The Company must pay to ATFBank within 5 days after being requested to do so by the bank, and late payment by the Company incurs a pentalty of 0.1% of the overdue amounts per day of delay. The guarantee is valid for as long as any amounts owned by Idrissov to ATFBank under the loan remain outstanding.

Question 31

What is the rate for capital gains tax for individuals?

Answer 31

10%