Dana Gas Strikes Again - "It's Just a Contract"

The above should not be read to imply that AA considers this a minor lapse.

Dana Gas has apparently struck again, suggesting its earlier unilateral abrogation of its legal obligations under its sukuk was no fluke.  

It seems that in negotiating the settlement with the KRG, DG and Crescent Petroleum did not obtain the consent of MOL Group Hungary, a ten percent shareholder in Pearl, before finalizing the agreement with the KRG. 

As noted in earlier posts, the agreement among Pearl’s shareholders gives the minority shareholders—MOL, RWE, and OMV—certain rights including the ability to veto some decisions of Pearl. 

MOL asserts that the settlement with the KRG is a decision that requires shareholder unanimity and that it did not provide its consent.  I’ve provided excerpts from DG’s and MOL’s press releases below.  

But first some comments.

1. Counterparties considering concluding contractual arrangements with Pearl Petroleum and Dana Gas would be well-advised to carefully consider this “event” and whether it is further evidence of DG’s and PPL’s less than sterling record of honouring legal agreements. 
2. As a side comment, AA notes that behaviour of this sort, if unchecked, might lead to widespread adoption of a cavalier attitude to legal agreements on a wider basis.  Countries may even be tempted to re-read binding treaties and find imagined breaches of the spirit of an agreement. 
3. The hapless creditors in DG’s sukuk should carefully consider how to protect themselves in the ongoing restructuring negotiations.  What is the value of the word of a counterparty that appears to have a relaxed attitude towards legal obligations?  No doubt not USD 690 million.  Probably not USD 690.  
4. On the other hand, if Dana’s assertion is that MOL is using “legal technicalities” in an effort to extort benefits or to abrogate the existing Pearl shareholders’ agreement is correct (a mighty big “if”), then this would seem a case of karmic comeuppance.   Perhaps to be followed by Baghdad reopening the concession agreements when it has settled affairs with the KRG. 
5. In the arbitration proceedings will MOL be able to make a convincing case to the LCIA to DG's disadvantage that DG’s conduct with the sukuk and the shareholders’ agreement is part of a pattern of cavalier disregard and bad faith towards legal obligations? 
6. Will Abu Yusuf come up with another far-fetched distortion of Shari’ah to support DG’s actions re the KRG settlement?  If he does, will the LCIA “buy” it?
7. Are the fine courts of Sharjah standing by to issue an injunction if the LCIA proceedings seem to be going MOL's way?
8. Will DG’s shareholders providentially and of course completely of their own volition intervene in Sharjah’s fine courts to block the arbitral proceedings or award?  

Here’s the excerpt from DG’s press release. 

The Settlement Agreement with the KRG was welcomed and endorsed by Dana Gas, Crescent Petroleum, OMV and RWE, together holding 90% of the shares of Pearl. Unfortunately, MOL (a 10% shareholder of Pearl) unreasonably sought to link its endorsement of the settlement to a renegotiation of the terms by which it first secured its participation in Pearl back in May 2009 (namely its commitment to certain contingent payments) and now complains about Dana Gas and Crescent Petroleum for their handling of the settlement alongside Pearl, expressing dissatisfaction with the outcome as compared to the alternative of pursuing a final litigation and enforcement outcome against the KRG.

And from MOL’s press release.  I’ve boldfaced a key sentence which if true presents a world of trouble for DG and other shareholders. 

MOL Plc. (“MOL” or “MOL Group”) hereby notifies the market of the following:  MOL joined Pearl Petroleum Company Limited ("Pearl") in 2009 as a shareholder with a 10% stake and strong minority rights. Pearl’s shareholders include, among others, Dana Gas PJSC ("Dana Gas”) and Crescent Petroleum Company International Limited (“Crescent”). Dana Gas and Crescent, along with Pearl, entered into an agreement to settle Pearl’s long-standing dispute with the Kurdistan Regional Government of Iraq (“KRG”) on 30 August 2017 (the “Settlement Agreement”), without properly consulting MOL or obtaining requisite approval, in breach of MOL’s contractual rights. MOL accordingly served a default notice on Dana Gas and Crescent on 11 September 2017 in accordance with the mechanism agreed by and between the shareholders of Pearl. The default notice has severe legal consequences for the defaulting shareholders, their shareholdings in Pearl and their related entitlements. As announced by Dana Gas earlier today, MOL received a Request for Arbitration from Dana Gas and Crescent in the London Court of International Arbitration, disputing the validity of MOL’s default notice. MOL will take all appropriate steps to enforce and protect its rights.

EU Commission Irish Tax Ruling in Re Apple: Tim Cook and Abu Arqala Outraged

AA is Paying Attention.  Are You?

This Tuesday the EU leveled some pretty serious allegations against both Ireland and Apple regarding Irish tax treatment of two Apple subsidiaries. 

Tim Cook, Apple's CEO, is outraged.  With just nineteen eloquent words he both defended Apple's reputation and demolished the EU's apparently baseless allegations. More here.

“When you’re accused of doing something that is so foreign to your values, it brings out outrage in you.”

I've boldfaced a few words above to highlight what I think is the central point in Tim's argument. 

Values!  Values, indeed. 

Where would we all be if people and corporations didn't have values? It isn't and shouldn't be "all about the Benjamins."  There are some principles or values that should guide our lives as individuals and corporations. Character informs the values chosen. And actions more than words demonstrate both character and values. 

That being said, sometimes things are "foreign to one's values".  In AA's experience often when they are foreign (cross-border).

Frankly, since learning about the EU's no doubt intemperate ruling, I've been so outraged that I haven't been able to post. 

But today I'm calm enough to go on record in joining Tim in his outrage, or perhaps, more precisely in outrage.  

In the interest of fairness and to show you how the EU has apparently overstepped the bounds of common sense as well as the sovereignty of Ireland, let's give voice to the EU's allegations.  After reading them, I'm sure you will be as outraged as AA and equally comforted by Tim's eloquence! I've added boldface to some of the text below to highlight the EU's no doubt spurious reasoning and overreach.

"Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules. The Commission's investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014."

In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This is due to Apple's decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland

The two tax rulings issued by Ireland concerned the internal allocation of these profits within Apple Sales International (rather than the wider set-up of Apple's sales operations in Europe). Specifically, they endorsed a split of the profits for tax purposes in Ireland: Under the agreed method, most profits were internally allocated away from Ireland to a "head office" within Apple Sales International. This "head office" was not based in any country and did not have any employees or own premises. Its activities consisted solely of occasional board meetings. Only a fraction of the profits of Apple Sales International were allocated to its Irish branch and subject to tax in Ireland. The remaining vast majority of profits were allocated to the "head office", where they remained untaxed 

Therefore, only a small percentage of Apple Sales International's profits were taxed in Ireland, and the rest was taxed nowhere. In 2011, for example (according to figures released at US Senate public hearings), Apple Sales International recorded profits of US$ 22 billion (c.a. €16 billion[1]) but under the terms of the tax ruling only around €50 million were considered taxable in Ireland, leaving €15.95 billion of profits untaxed. As a result, Apple Sales International b. In subsequent years, Apple Sales International's recorded profits continued to increase but the profits considered taxable in Ireland under the terms of the tax ruling did not. Thus this effective tax rate decreased further to only 0.005% in 2014.

 The EU has prepared an "infographic" which provides a summary overview of the tax structure.

I trust you share my outrage and Tim's too.