Corporate Governance in Mining

November 2011

There has been much publicity in recent days concerning the perceived lack of proper corporate governance standards in overseas companies, particularly mining and mineral companies, listing in London. 

A recent announcement by UralKali, the world's largest potash producer by volume, that it was considering a premium listing on the London Stock Exchange was typical of the trend, as it was stated that the premium listing would be "in part to banish lingering concerns about its standards of corporate governance". Three other Russian resource companies (Polyus Gold, Polymetal and Evraz) also announced recently that they plan to reincorporate, seek a premium listing in London and aim for inclusion in the FTSE 100. 

Corporate governance is widely perceived to be a "good thing" but there is nothing in a UK listing, whether premium or standard, which formally requires corporate governance to a minimum standard. EU directives require a statement in the audited accounts referring to the corporate governance code that applies to the Company and whether it complies with the code. In short, this is "comply or explain". Furthermore, the corporate governance reporting requirements apply whether the company has a premium or a standard listing and so the statements about improved corporate governance coming with a premium listing are certainly wide of the mark.

There are disadvantages if a UK company is used as the listing vehicle. The FSA will not admit shares of a company incorporated outside the EEA (the 27 member states of the EU plus Norway, Iceland and Liechtenstein) that are not listed either in the country of incorporation or the country where a majority of the shares are held. 

Where a UK company is used as the vehicle there are several issues which need to be considered carefully:

• The UK Bribery Act will apply: this should not cause any real problem for most well run companies but it should be noted that facilitation payments, which are permitted under the equivalent US legislation, are unlawful. 
• Transfers of UK listed shares are subject to stamp duty at 0.5% or at 1.5% on transferring to a clearance mechanism.
• Directors both executive and independent will be subject to UK income tax, which at 50% at the margin is high compared with other countries.

Finally, statements that large shareholders in listed companies have been restricted to 30% voting because of poor corporate governance in their countries of operation are just wrong. Where there is a reverse take-over, as sometimes happens with the cash shells listed on the LSE or AIM, selling shareholders who end up with more than 30% of the enlarged issued share capital of the vehicle are required by Rule 9 of the Take-over Code to make an offer for the remainder of the shares unless there is what is called a "whitewash" first, where the existing shareholders resolve that a Rule 9 offer is not required. 

Another way of dealing with the same issue is for the vehicle to issue voting shares capped at just under 30% and for the remainder of the share issue to take the form of suspended voting shares. That avoids the obligation to make an offer for all the shares in the acquiring vehicle and that is the reason for the 30% level – nothing to do with poor corporate governance, actual or perceived.

Nick Hutton, one of Holman Fenwick Willan's leading corporate Partners advised on the Bumi plc acquisition of Bumi resources and Berau Coal and directly addressed the issue of corporate governance for resources issuers at a Mining Seminar the firm held in Partnership with Moore Stephens LLP and KBC Technologies, on Thursday 17 November 2011. If you would like further information about the topics covered during this seminar, please contact events@hfw.com.

For further information about corporate governance issues, please contact Nick Hutton, Partner on +44 (0)20 7264 8254 or nick.hutton@hfw.com.