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Croatian Government’s strategic rights over INA

Croatian Government’s strategic rights over INA

Despite being a minority shareholder without management control of INA, the Croatian Government successfully negotiated veto power and special rights over the future ownership of INA.

The First Amendment to the Shareholders Agreement granted additional rights to the Croatian Government, beyond those that it was eligible for under the terms of the initial 2003 Shareholders Agreement.

In particular, the First Amendment to the Shareholders Agreement changed the Supervisory Board structure as follows:

  • The number of Supervisory Board members was increased from seven to nine, with the Croatian Government given three seats (instead of two out of seven seats under the terms of the initial 2003 Shareholders Agreement).
  • MOL was granted five Supervisory Board members with INA employees nominating the ninth member

In addition, the Croatian Government was granted the right to appoint three members of the Management Board, alongside the three members appointed by MOL.

It is important to note that such strong representation on the operational management team by a minority shareholder is not a usual practice in the oil and gas industry and that although MOL ultimately held INA’s management rights, the Croatian Government – despite being a minority shareholder – still enjoyed strong supervisory rights over the operations of the company.

Moreover, the Croatian Government retained veto power in areas relating to national energy supply security and where decisions on strategic energy assets are concerned. In particular, it obtained specific rights pertaining to any decisions that would affect INA’s future ownership, above and beyond the terms of the initial 2003 Shareholders Agreement.

Some of the rights granted to the Government of Croatia under the 2009 First Amendment to the Shareholders Agreement are not considered standard in such arrangements; however, MOL fully recognized the importance of INA to Croatia’s economy and was therefore keen to alleviate the Government’s concerns by agreeing to these additional rights:  

  • During a 5 year ‘lock-up’ period between 2003 and 2008 stipulated by the 2003 Shareholders Agreement, MOL was not allowed to transfer or sell any of it shares.  An additional right granted to the Government of Croatia under the new agreement in 2009 extended this ‘lock-up’ period by an additional 5 years.  
  • The Government also requested and gained the right to repurchase MOL’s stake either directly or through a nominated party should MOL be subject of a hostile takeover.
  • Furthermore, the Croatian Government also gained the right of first refusal, whereby if MOL wanted to sell its stake in INA to a third party following the expiry of the extended ‘lock-up’ period, the Government has the right to either re-purchase MOL’s stake at market prices or with the same conditions as the potential buyer.

These rights effectively secured the Croatian Government’s high level of oversight and influence on INA’s future. They were formally incorporated into the agreement signed in 2009.

Gas Master Agreement

Letter of consent to disclosure

Besides the First Amendments signed to the Shareholders Agreement, the Croatian Government and MOL agreed to conclude a further agreement to ensure that certain elements of the gas value chain, necessary for security of supply, are controlled by the Government. This was also designed to allow INA to mitigate the regulatory risks related to gas price regulation.

INA’s gas business, including the storage and supply & sales divisions, used to be an integral part of the company’s upstream operations until the end of 2008. According to INA’s Financial Statements, the company incurred approximately 1 billion HRK (over ~EUR 134 million) in losses for the gas supply & sales in 2007, while in 2008 alone the loss reached almost HRK 1.5 billion (~EUR 201 million). The gas supply & sales business remained a loss-making operation as a result of government policy capping gas prices artificially lower than the cost of gas bought from Russian and other foreign suppliers.

During the negotiations around the potential amendments to the 2003 Shareholders Agreement, the Government of Croatia explicitly declared its intention to control INA’s gas storage business for security of supply reasons. MOL made it also clear that on one hand without having full control over storage facilities, the supply obligation cannot remain with INA. Furthermore, MOL also needed to mitigate the regulatory risks associated with the gas supply & sales division given that only the Croatian regulator has the ability to set national gas prices. The Government also intended to control the long-term supply contracts for the Croatian market. The parties also acknowledged that in line with Croatia’s expected EU accession, the country needed to further open its gas market and liberalize prices.

As a result of these discussions, both MOL and the Government of Croatia agreed that the gas storage business and gas trading business, originally integrated in INA, needed to be unbundled. Alongside the First Amendment to the Shareholders Agreement (FASHA), MOL and the Government of Croatia also signed the Gas Master Agreement (GMA) which required the Government to take over INA’s gas storage and trading businesses by July 1, 2009. The separation of the gas storage activities from INA, and it’s unbundling into a separate legal entity (either 100% owned by INA or someone else), was also requested by relevant EU internal market rules.

Provided both parties adhere fully to the provisions of GMA, the agreement would have paved the way for a predictable and profitable gas business owned by Government of Croatia and would have provided for a predictable regulated business environment for INA.

First Amendment to the Gas Master Agreement

At the Government’s request to remedy its legal breaches under the signed contract with MOL, the parties negotiated and signed the First Amendment to the Gas Master Agreement in December 2009, which:

  • Postponed the deadline for the takeover of the Gas Trading Company until December 1, 2010.
  • Agreed that the Gas Trading Company would operate without generating losses until the takeover on December 1, 2010.  
  • Agreed that the royalties payable by INA on its hydrocarbon production would gradually increase from the 2008 level until 2015 by 0.5% each year, and would be set at 10% in the period of 2015 to 2024.
  • MOL also agreed to provide INA with a credit facility for the settlement of the company’s overdue tax liabilities and interest.

However, the Government failed to respect the new deadline for the acquisition of the Gas Trading Company too. In July 2013, MOL formally notified the Croatian Government of impending legal action in case of continued inaction on this breach. In November 2013, MOL subsequently initiated arbitration by submitting a request for arbitration with the International Centre for Settlement of Investment Disputes (ICSID) under the Energy Charter Treaty. The arbitration remains ongoing.