The Government of Kuwait and The Britiah Petroleum Company
plc
A report on the merger situation
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Summary
The merger situation
During the autumn and winter of 1987-88 the Government of
Kuwait acquired a holding of shares of The British Petroleum
Co plc (BP) amounting to some 21-6 per cent of its issued
ordinary share capital. On 3 May 1988 the Secretary of State
for Trade and Industry required the Commission to investigate
and report on whether a merger situation had been created
and, if so, whether it
operated or may be expected to operate against the public
interest (Appendix 1.1). A merger situation would be created
if the holding gave the Government of Kuwait the ability materially
to influence the policy of BP.
BP's share capital is very widely held. At 21-6 per cent the
holding by the Government of Kuwait dwarfs all others, the
next largest individual beneficial holdings being the 1 -8
percent held by the Prudential Corporation and 1 -7 per cent
held by the United Kingdom Government (HMG). Votes represented
by proxies given at BP's general meetings have generally ranged
between 12 and 14 per cent of its issued share capital. The
Commission concluded that the Government of Kuwait's holding
gave it the ability materially to influence the policy of
BP.
The issues
BP is the United Kingdom's largest company and the third largest
international oil company. It is the largest producer of oil
and holder of oil reserves in both the United Kingdom and
the United States. It occupies an important place in the United
Kingdom economy, and the major sector in which it operates,
oil extraction, refining, marketing and trading, is of strategic
importance. The
Commission concluded that its ability to operate independently
and free from external governmental influence was a matter
of public interest.
The economy of Kuwait, which has vast reserves of low-cost
oil, is heavily dependent on oil extraction, refining and
marketing and Kuwait is one of the founder members of the
Organisation of the Petroleum Exporting Countries (OPEC) and
plays a leading part in that organization. The state-owned
Kuwait Petroleum Corporation (KPC) operates on a world-wide
basis in all sectors of the oil industry.
BP, and Kuwait through KPC, are therefore major participants
and competitors in the oil industry, both in extraction and
downstream activities. The oil policies of OPEC and Kuwait
have diverged and still diverge from those of HMG and BP.
Assurances and undertakings
A particular feature of the reference was the assurances and
undertakings given by the Government of Kuwait in relation
to their shares in BP. At a late stage in the reference the
assurances and undertakings were incorporated in the form
of a Deed executed by the Government of Kuwait. The Secretary
of State for Trade and Industry, who was named in the Deed,
disclaimed the document and it was therefore ineffective.
Despite this disclaimer, the Commission gave due and careful
consideration to the provisions of the Deed and to the assurances
previously given embodied in it and concluded that limiting
voting rights to 14-9 per cent would not in the circumstances
remove the ability to influence the policy of BP and that
the overall size of the shareholding gave cause for concern.
The Commission's reasons appear fully in the report (paragraphs
8.32 to 8.39 and paragraphs 8.123 to 8.125).
Our conclusions
The Commission have concluded (Chapter 8) that the merger
situation may be expected to operate against the public interest.
In coming to this conclusion, the Commission took into consideration,
amongst other matters, the areas of potential conflict of
interest over the long term between the State of Kuwait on
the one hand and BP and the United Kingdom on the other hand.
Unlike other shareholders Kuwait is a sovereign state with
wide strategic and political interests and could be expected
to exercise its influence in support of its own national interest.
This would be to the detriment of BP's interests and to the
United Kingdom's public interest. Among the factors taken
into account by the Commission were:
(a) the strategic and economic importance of oil and its place
in the fluctuating relations between the West, including the
United Kingdom, and the states of the Middle East which results
in a basic conflict of interest between the countries of the
Gulf with vast reserves of oil that are and will remain cheap
to extract and oil-consuming countries including those with
dwindling reserves of oil that will become more difficult
and costly to extract; and
(b) the likelihood of future conflicts of interest on matters
such as the exploration and development of new production
facilities for oil; research and development including the
development of substitute sources of energy or oil products;
and downstream acquisition policy.
Our recommendations
In all the circumstances the Commission concluded that the
effective remedy for the public interest detriments would
be for the shareholding of the Government of Kuwait to be
reduced to the level at which the capacity to exercise material
influence was removed. The Commission therefore recommended
that the Government of Kuwait should be required to reduce
its shareholding to the level of 9-9 per cent of BP's issued
capital over a period of some 12 months.
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