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Engineless ships and public feuds – What we can learn from Urals Energy’s ongoing misfortunes (UEN)

The ongoing battle between the board of Urals Energy (LSE:UEN) and the president of its Russian subsidiary has taken a bizarre turn this week with the unauthorised purchase of a broken ship and a public slanging match.

Shares in the resources business have fallen by more than 66pc to 24.5p since the feud first arose on 10 October. At this time, Urals said it believed that Mr S Kononov, president of its Petrosakh subsidiary, had made a $1.5m loan without board consultation. It accused Kononov, whose family owns a 44pc stake in Urals, of lending the money to a third party. It said the money funded the purchase of an additional interest in Urals’ partially-owned Kholmst Port.

The loan left Urals’ working capital position ‘significant constrained’. To fix this, the company launched an accountants’ review into its cash flows. In November, this revealed that Kononov had issued the $1.5m to a fellow Petrosakh employee at a 7.5pc interest rate. This is below the cost of Petrosakh’s own borrowings.

It also found that Kononov had made several more unauthorised loans. Many of these were issued to parties thought to be closely associated with the president. All-in-all it, is estimated that $5.1m has been loaned on Kononov’s authority. Urals has proposed that the president must take personal responsibility for the lending. It has also asked him to resign from his role imminently.

At the time, chairman Andrew Shrager said: ‘It should be remembered that Mr Kononov represents the holding of some 44% of the shares of the Company, which we believe are now held to the benefit of his daughter by a trust. This makes Mr Kononov’s actions even more difficult to understand. We will begin the search for a new president for Petrosakh shortly.’

This month has seen things get even more convoluted. On 11 December, Urals received a letter from a 44.6pc shareholder called Adler Impex requisitioning a general meeting. Adler Impex wants to remove Shrager and fellow directors Leonid Y. Dyachenko and Stephen Myers Buscher from Urals’ board. It wishes to replace them with four individuals called Vladimir Rusinov, Alexey Maximov, Vasily Mesheryakov, and Jean-Pascal Hilaire Peltier.

Urals said it had not received any information about these proposed board members other than their passport numbers. Perhaps unsurprisingly, it traced Adler Impex to a trust held for the benefit of Kononov’s family.

Meanwhile, Kononov has refused to resign as president of Petrosakh. Urals said he does not accept responsibility for the loans and has not said definitively that he will pay back any of the money issued. Instead, he cites a stipulation of Russian law that gives him, as a president of a joint stock company, the authority to approve any action worth up to 25pc of a company’s capital. This can include contracts, loans, and asset sales. Urals says it does not allow the use of these powers unless they have been board-approved.

Earlier this week, things took an even more bizarre turn. In an RNS, Urals said Kononov has authorised the acquisition of a passenger ship for $161,000. The vessel, held in a port in South Korea, does not have a working engine.

‘The Board believes that this ship may not be seaworthy,’ Urals pointed out handily. ‘The Board has also informed Mr Kononov that this transaction is unlikely to be approved by the Board.’

Meanwhile, in an apparent bid to sink the ship both literally and figuratively, Kononov made several accusations against Urals in a letter posted to Petrosakh’s website. Among these, he accused its board of strategic and financial mismanagement. He added that the directors had eschewed their responsibilities by staying in London to ‘strategise’ while he alone drove operational progress in Russia. Finally, he also addressed the unauthorised loan accusations at length, writing:

‘I would like to explicitly state that the mentioned loans made to various parties in the course of business are in full compliance with Russian legislation […] All loans have been well documented and have strict terms attached to them, which we are fully prepared to enforce if and when necessary. Also, none of the loans were a secret to the Board of UEPCL.

‘I resent the fact that the Board rushed to judgement and even wasted company funds to hire an independent auditor to prepare a report. I believe this report can hardly be considered as a complete and unbiased undertaking due to work on it being suspended by the Board. Finally, I believe that the financial health of JSC Petrosakh has been negatively dramatized by the Board for reasons unknown to me.’

Yesterday saw Urals issue a response to the notice. The firm said Kononov’s allegations are ‘without substance and not supported by facts’. It also objected to the president’s claims that the board has not participated in local Russian matters and that he disclosed his loans.

‘Urals Energy’s shares are traded on AIM and the Board has always taken care to ensure that any information it announces is not misleading, false or deceptive and does not omit anything likely to affect the import of such information,’ it added.

And that brings us to today.

While this ongoing saga may be compelling, it is also concerning. Regardless of who is right and who is wrong, the spat has cost Urals’ shareholders a considerable amount of value. It has also left the business with a large working capital deficit. It serves as another reminder of carrying out thorough due diligence on junior stocks before investing.

However, it also highlights the risk often taken on when investing in unfamiliar jurisdictions. The stipulation that the president of a Russian company can issue up to 25pc of its share capital without board consent seems risky and arbitrary. Nonetheless, it does appear to be a law. This case is unusual. However, wherever possible, it is best to be wary of opening yourself up to too much jurisdictional risk when investing.

Author: Daniel Flynn

Disclosure: The author does not own shares in the company mentioned in this article

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