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most of the then-existing subsidiaries and assets held by KEC Kuwait to the Issuer, and transferred, by way of a capital
reduction, 90.0% of the ordinary shares of the Issuer then held by KEC Kuwait to the existing shareholders of KEC
Kuwait at that time. As a result of the 2011 Restructuring, the Issuer became the holding company of the Group. The
residual 10.0% of KEC Kuwait’s shares in the Issuer (now 9.66%) remained in the hands of KEC Kuwait. Following the
Offering, the Issuer intends to repurchase these shares and eliminate the cross-holding.
Under Law No. 25 of 2012 (as amended) and its executive regulations (the “
Companies Code
”), foreign ownership of
Kuwaiti companies is limited to 49%, except to the extent that the foreign owners are nationals of, or legal entities
incorporated in, countries that are members of the Gulf Corporation Council (“
GCC
”). “
Risk factors—Risks relating to
the Group—The Group’s ownership structure is subject to risks associated with foreign ownership restrictions in
Kuwait
.”
In order to consolidate ownership of KEC Kuwait under the Issuer (a non-GCC entity) while complying with this
requirement, in July 2014 the Group entered into the KEC Kuwait Restructuring by which legal ownership over 51% of
the KEC Kuwait shares were transferred to Awal II (“
Awal II
”), an SPV incorporated in Bahrain, a GCC country, which
is in turn held through a chain of intermediate Bahraini entities with the ultimate beneficial ownership being with a
Kuwaiti company. In order to ensure that the Issuer retains full economic and control rights over KEC Kuwait, the
Issuer has entered into: (1) a “total return swap” arrangement, as described in “—
Share Swap Transaction
” below, under
which Awal II is obligated to pay the Issuer an amount equal to the economic returns derived from ownership of the
KEC Kuwait shares, and (2) a management agreement, as described in “—
Management Agreement
” below, under which
the management of, and all operational decision-making power over, Awal II is vested solely in the Issuer. Moreover,
pursuant to economic interest assignment agreements, all of the rights and obligations in respect of KEC Kuwait’s
interest in the Block 9 service agreement and its 20% interest in Medco LLC have been transferred to Kuwait Energy
Iraq Ltd and KEC Gulf Holdings Limited, respectively, both of which are wholly-owned subsidiaries of the Issuer.
To implement the above-described arrangement, in June 2014, the shareholders of KEC Kuwait were invited to tender
their shares of KEC Kuwait to Awal II in a one-to-one exchange for ordinary shares of the Issuer; as at the date of this
Offering Memorandum, shareholders of over 51% of the shares of KEC Kuwait have transferred their shares in KEC
Kuwait (in exchange for shares in the Issuer). The Group expects additional acceptances to continue to accrue over the
remainder of 2014, and estimates that over 95% of the shares of KEC Kuwait will be held by Awal II by the end of 2014.
Share Swap Transaction
Pursuant to a total return share swap transaction dated 9 July 2014 (the “
TRS
”), Awal II has undertaken to pay the Issuer
an amount equal to the economic returns derived from ownership of the KEC Kuwait shares. This arrangement applies in
respect of the proportion of the issued share capital of KEC Kuwait held by Awal II (over 51% as at the date of this
Offering Memorandum).
Under the terms of the TRS, the Issuer has the option to pay to Awal II the cash value of the aggregate number of shares
of KEC Kuwait held by Awal II, at a value to be determined by a calculation agent.
The TRS will terminate on 9 July 2113, unless terminated earlier by Kuwait Energy plc by notice in writing.
The TRS is governed by and construed in accordance with English law.
Management Agreement
Pursuant to a management agreement expected to be dated 13 July 2014 (the “
Management Agreement
”), Awal Shares
and Securities Co. W.L.L., the parent company of Awal II (“
Awal
”) and Awal II appoints the Issuer to exercise full
operational, management and strategic control over Awal II and its subsidiaries.
Under the terms of the Management Agreement, the Issuer is responsible for all aspects of the management, operation
and strategic direction of Awal II, including: (i) determining strategic matters relating to the acquisition and disposal of
assets of Awal II and its subsidiaries (including the shares of KEC Kuwait held by Awal II); (ii) exercising management
representation of Awal II in relation to any subsidiaries of Awal II; (iii) managing the operations of Awal II and its
subsidiaries; (iv) managing the cash flow of Awal II and its subsidiaries; and (v) negotiating and agreeing terms with
banks to obtain any permissible financing for Awal II and its subsidiaries and their business operations.
The Management Agreement will continue to be in full force until 50 years after the date of the agreement. This initial
term is automatically renewable for a further 25 years. Under the terms of the Management Agreement either party has a
right to terminate the agreement if the other party is guilty of gross negligence or wilful default in the performance of its
obligations, or if the other party fails to perform any of its material obligations under the agreement.
