Shareholders Call for Probe into Corporate Misconduct at ZCCM-IH

An open letter from independent shareholders of ZCCM-IH formally calling for investigations by the Securities and Exchange Commission into corporate misconduct by the Directors of ZCCM-Investment Holdings To : Dr. E. D. Wala CHABALA, Chief Executive Officer Securities and Exchange Commission of Zambia 13 August 2013 Dear Sir, This letter is a formal request from independent shareholders of ZCCM-IH to the Zambian Securities and Exchange Commission (SEC) for an investigation into the activities of the Company Secretary, Mr Chabby Chabla, the Executive Director, Mr Wila Mung'Omba and the Board of Directors of ZCCM-IH for possible professional misconduct in the execution of their duties. This request concerns four events: 1) Repeated discrimination against shareholders who bought shares via the Paris Stock Exchange, 2) The exclusion of these same shareholders from attending General Meetings of the company, 3) Interference by the Company Secretary in a vote to nominate a representative of independent shareholders to the Board of ZCCM-IH, 4) The conflict of interest of the seven members of the Board of Directors in excluding the 8th Board member to represent the minority shareholders until after the completion of a major financial deal involving the interests of all the shareholders. We make this request to the SEC as the guardian of the rules of equality and fair treatment for all shareholders of companies quoted on the Lusaka Stock Exchange. Previous requests to the SEC concerning the corporate governance of ZCCM-IH have produced no tangible results so far. We recognise however that to improve the governance of a state-controlled company that, for years, has openly flouted the rules of the LuSE and disregarded all its shareholders will be a long process. We continue to believe that the SEC can and will use its authority to persuade ZCCM-IH to put its house in order and finally apply the rules of good corporate governance and management. The international credibility of every financial institution in Zambia will be called into question if the SEC fails to enforce the rules that regulate the financial sector in Zambia. In this case however, we choose to make this letter public since we believe that the Zambian people should know just how this major state-run company is being managed. ZCCM-IH was set up to provide the Republic of Zambia with a significant interest in the Zambian mining sector so that the Zambian people could benefit from the vast mineral wealth of the country. However, under the present Direction the value of the company continues to fall at a time when the foreign-run copper mines in which it has major investments are making huge profits. This situation has gone on undisclosed for far too long. In the coming weeks the Independent Shareholders of ZCCM-IH will publish their first half-yearly report to give their point of view on the Governance and Management of ZCCM-IH. We hope to be able to report on significant progress on the way the company is governed and managed, but this will depend entirely on how ZCCM-IH chooses to respond to our action. We will keep you informed of any future breaches in the corporate governance of ZCCM-IH. 1

Background On the 9th May 2013 the ZCCM-IH Minority Shareholders wrote a first open letter to the Securities and Exchange Commission entitled Is the ZCCM-IH register of members fit for purpose. This letter explained how ZCCM-IH had for many years deliberately maintained and used a register of shareholders that, in practice, excluded 96% of the minority shareholders from taking part in or voting at the Company's General Meetings. This left the management of the company in the very comfortable position of being able to totally disregard its independent shareholders, a position it has continued to enjoy with impunity. We are pleased to announce that the SEC responded immediately to this letter. In the following days, with uncharacteristic urgency, the Company Secretary of ZCCM-IH also replied explaining that steps were being taken to find a solution to this problem. Since then the company has remained characteristically silent on this issue. The only response has been from the Executive Chairman, Mr Wila Mung'Omba, who threatened legal action if the elected representative of the minority shareholders continued to seek to exercise his right to represent the independent shareholders. This is not a good omen for the transparency and good corporate governance of ZCCM-IH. In this second letter we write to explain how the Company Secretary and the Executive Chairman of ZCCM-IH knowingly used the improper register of shareholders to distort the outcome of the nomination of a new member of the board to represent the minority shareholders. We also explain how the exclusion of this board member is motivated by a financial deal organised by the current Board of Directors against the interests of ZCCM-IH and its the historical shareholders. In conclusion, the independent shareholders formally request an investigation by the LuSE and the SEC into possible misconduct by the Directors of ZCCM-IH in relation to these events.

1) The election for the Board Member to represent minority shareholders.

During this election, according to the procedure set up by ZCCM-IH, the unfit register of members was used to validate the rights of shareholders to vote. This resulted in according direct voting rights to the registered 4% of minority shareholders, and much more restricted voting rights of the remaining 96% unregistered shareholders. Only the vigilance and ingenuity of these same unregistered 96% lead to the failure of this plot. A key event in this story of improper corporate governance occurred on the 16th march 2012 when ZCCM-IH sent out the following circular :
ZCCM INVESTMENTS HOLDINGS PLC CIRCULAR TO SHAREHOLDERS 16th March 2012 1. Introduction Article 72 of the Articles of Association of ZCCM Investments Holdings Plc (ZCCM-IH) provides that Directors shall be not less than seven and no more than eight. Following consultations with the majority shareholder, it has been agreed that the eighth director on the ZCCM-IH board should be a representative of the minority shareholders who together hold 12.4% of the issued capital of ZCCM-IH. The mandate to allow the minority shareholders nominate a person to represent them on the ZCCM-IH Board has been given in an effort to promote good corporate governance in the Company

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Purpose of Circular The purpose of this Circular is to provide an equal opportunity to all minority shareholders to make a nomination for the person/institution they wish to represent them as director on the ZCCM-IH Board. The appointment of such a director is anticipated to be made at the next Annual General Meeting of the Company at a date to be advised or failing that the one that follows the next. General criteria for nominees Any person/institutions nominated as candidate to be appointed as director representing minority shareholders on the ZCCM-IH Board shall be one that satisfies the following; Not be prohibited by Zambian Statute from acting as Director, Not have a receiving order made against him or her, Not have any order made by any court claiming jurisdiction in that behalf on the ground of mental disorder for his/her detention or for appointment of a guardian or for appointment of a receiver or other person to exercise powers with respect with his property of affairs, Not prohibited by the Articles of Association of the Company. Nomination Shareholders are invited to send in nominations using the attached Nomination Form to the named office at the address below on or before 18th May 2012. Any nominations received after 18th May 2012 will not be accepted. Nominations can be submitted by physical mail, fax or email; The Company Secretary ZCCM Investments Holdings plc lst Floor Mukuba Pension House 5309 Dedan Kimathi Road PO Box 30048 Lusaka, 10101, Zambia

In spite of the following written commitment to uphold good corporate governance : The mandate to allow the minority shareholders nominate a person to represent them on the ZCCM-IH Board has been given in an effort to promote good corporate governance in the Company, ZCCM-IH then went on to condition the outcome of the election by restricting voting rights to members listed in the Register of Members that, in practice, discriminated against 96% of the electorate. Only 4% of the minority shareholders, i.e. those listed in the ZCCM-IH register of members, received this circular. However, since the text in the circular was addressed to all minority shareholders, the other 96% felt rightly concerned. As our letter of the 9th May explains (see Further reading), shareholders asked how nominations submitted by shareholders not listed in the register would be considered if they submitted signed documents from their banks certifying their ownership of ZCCM-IH shares. The Company Secretary replied in writing that such nomination forms would be refused and not be taken into account in the nomination process. Only those members listed in the register would be considered. How did this election work out in practice ? The 4% of shareholders listed in the Register of Members used by ZCCM-IH were invited to return their completed nomination forms simply and directly to the Company Secretary of ZCCM-IH. The other 96% of shares (more than 10 million) are listed in the register under the name of a single nominee called Euroclear France. Euroclear is in fact the depository for ZCCM-IH shares listed on the Paris Euronext Stock Exchange, but is not itself a shareholder of the Company. Shareholders grouped under the nominee Euroclear did not receive the Circular to Shareholders and were told that any nomination forms sent by them to the Company Secretary, even those backed up by signed shareholder certificates from their banks and brokers, would be refused and not be taken into account. At the request of shareholders who had learnt of the above Circular, Euroclear exceptionally offered to act as an intermediary to submit nominations on behalf of these unregistered shareholders. 3

In this complex procedure, shareholders were able to submit their nomination forms to their banks and stockbrokers who in turn were asked to submit them with very specific instructions to Euroclear. Finally, Euroclear submitted a summary of validated nominations to ZCCM-IH. Although many votes were lost in this complicated procedure, the true minority shareholders were able to nominate their chosen representative backed up by more than 1.5 million shares, far more than any other candidate. As our letter to the SEC of the 9th May, 2013 describes, ZCCM-IH had already been informed of the proper procedure to adopt to update its share register so that the holders of all those shares held under the name of Euroclear were directly named in the register and so given equal voting rights to the other 4%. ZCCM-IH did not adopt this simple procedure and therefore deliberately discriminated against 96% of the independent shareholders. This is still true today. Faced with this result, which was never made public, the Company Secretary further tried to interfere in the result by announcing, several days after the closing date, that the consultation period had been extended for 5 weeks in contradiction to the terms of the Circular which stated Any nominations received after 18th May 2012 will not be accepted. At the end of this extension period, Euroclear once again nominated just one candidate to represent the minority shareholders, Mr Philippe Taussac, with a total of 1.6 million votes. Given that the total number of minority shares in circulation is 11,140,792 of which 10,681,476 shares are deposited with Euroclear, this leaves only 459,316 shares to be accounted for, quite insufficient to defeat Mr Taussac. In the following months, the minority shareholders asked many times for the official results to be published and the nomination of Mr Taussac to the board to be validated. In a further act of opaque corporate governance, the directors have maintained total secrecy on the outcome of the vote. The unfair and improper procedure used by ZCCM-IH to block the nomination of the Board Member to represent the minority shareholders, resulted in open discrimination against 96% of the independent shareholders. It also resulted in the company gaining time to organise a proposed rights issue in the absence of the only board member to represent these same shareholders.

2) The relation between the nomination of the Board Member to represent the minority shareholders and a proposed share issue
After a further delay of more than 6 months, the Board of Directors of ZCCM-IH made the following announcement :
12 DECEMBER 2012 Status of appointment of a director to represent minority shareholders on the ZCCM-IH Board. The company has been in discussions with the Government of the Republic of Zambia (GRZ) over loans that ZCCM-IH owes GRZ amounting to K2,139 billion as reflected in the 2011 Annual Report. Recently GRZ accepted proposals to convert all or part of the loans to equity through a rights issue. Following the impending debt-equity conversion via a rights issue referred to above, the Board of ZCCM-IH resolved that the appointment of a director to represent minority shareholders on the ZCCM-IH Board be deferred awaiting the conclusion of this transaction and further consultation with GRZ. Shareholders are therefore informed that this matter will await the completion of consultations with GRZ concerning the GRZ debt-equity conversion via a rights issue. By Order of the Board C Chabala, Company Secretary

In the above announcement, the Board of ZCCM-IH created a hitherto unexplained link between the deferred nomination of a Director to represent minority shareholders and a financial transaction between the Republic of Zambia and the acting majority shareholder. The conflicting interests of the majority shareholder To understand the importance of the government shareholding in ZCCM-IH, it is important to consider the possible conflict of interest between two facets of the majority shareholder which are driven by opposing long- and short-term interests. Irrespective of which political party holds office, The Republic of Zambia is the registered majority shareholder of ZCCM-IH with 87,6% of the shares. The Republic of Zambia is therefore the guardian and source of stability of this jewel of the Republic of Zambia. The Republic of Zambia, as the representative of the Zambian People has the same interests as the long-term minority shareholders of ZCCM-IH: to ensure that the company performs at its best over the long-term. At each change of government, the new government in power effectively takes over as the acting majority shareholder for the limited period of the new term of government. Although its authority is transient, the acting majority shareholder holds all the power to run ZCCM-IH as it sees fit for this limited period of time. This was all too clearly demonstrated after the last election when the new government immediately replaced all the board members and installed a new Executive Chairman, Mr Wila Mung'Omba at the head of the company. What we are now seeing is that that these new directors have chosen to privilege short-term objectives in favour of the government in power at the expense of those that optimise the long-term performance of the company and the Zambian people. Worse, the new proposal to issue new shares to be sold to pay off part of the longterm debt, will, for the first time since the existence of ZCCM-IH, dilute the value of the shares of all the long-term shareholders (including those held in the name of the Republic of Zambia) in exchange for cash to be paid to the actual government in power. What is the relation between this financial transaction concerning the majority shareholder and the deferred nomination of a new and independent board member ? To see the link between the nomination of an independent board member and this proposed financial transaction, we need to look at the second event, the issue of new shares to be sold or exchanged to pay off debt to the government in office. Issuing new shares is a very serious matter that concerns all the shareholders at the highest level. Its immediate effect is to mechanically reduce the value of all the existing shares of the company. The shares held by the Republic of Zambia as well as those held by the independent shareholders will be reduced by a ratio which will depend directly on the quantity and price of the shares to be issued. This process can only be justified if the shares are sold at their true value and money raised by the sale of the new shares is immediately put to good use to increase the value of the company as a whole. As we will demonstrate below, this is far from the case here. In process being proposed, the actual government in office will receive a substantial cash sum and/or new shares to be sold to undisclosed shareholders at a bargain price given the actual disastrous performance of the company. The overall process is very likely to substantially depress the future global value of ZCCM-IH for years to come. Whereas the seat for the 8th director to represent the minority shareholders remains empty, the 7 directors in place were all appointed by the acting majority shareholder to represent the interests of the government in office. In the absence of the 8th director, the independent shareholders have no way to address the board about the above concerns. In spite of our repeated requests, the company remains totally opaque about its true intentions. 5

As things stand, the 7 directors appointed by the government in office (and the cash benefactor of the deal), will decide and validate in secret, the terms of the transaction, in the absence of the only independent representative of the independent shareholders likely having most to lose from the deal. This deal has all the signs of being engineered to be highly unfavourable to the independent shareholders and to ZCCM-IH as a whole and highly favourable to the government in office and to new undisclosed shareholders. It is common practice in the emission of a rights issue that the historic share value is used to influence the value of the new shares to be issued. By creating bad relations with the independent shareholders, sending out unfavourable communication, demonstrating incompetent management and publishing misleading accounts, the Direction has driven down the value of ZCCM-IH shares to ridiculously low levels, providing an exceptional opportunity for new crony shareholders to cash in on the issue of new ZCCM-IH shares at a bargain price. The action of the Direction to discriminate against and then defer the nomination of the representative of the minority shareholders of ZCCM-IH has pushed many independent shareholders to sell their shares. The results is that the value of the company's shares is now extremely low, at less than one tenth of the net assets of the company. The major assets of ZCCM-IH are massively undervalued in the company's accounts at the historic cost values of 1999/2000, whereas these assets are now worth more than 20 times the quoted values, despite repeated requests to update the valuation of these assets and repeated promises that have been repeatedly broken. The Executive Director insists that the reason for the poor performance of ZCCM-IH is the negative balance sheet due to the debt owed to the GRZ, when the main reason for this negative balance sheet is the massively undervalued assets. This debt conversion is being proposed at a time when ZCCM-IH will receive enough income to pay back all its debts in just a few years. It has $80 million in securities and a scheduled income of $140 million due from KCM in addition to its regular income. ZCCM-IH is owed $570 million in undistributed profits from Kansanshi Mining plc. (a figure that grows by about $80 million per year), more than enough to repay the totality of the debt owed to the GRZ, yet neither the Direction, nor the GRZ has made any statement about trying to recover this overdue money. ZCCM-IH has taken no legal action to recover the hundreds of millions of dollars of dividends it has lost through the fraudulent accounting of Mopani Copper Mine. ZCCM-IH remains listed on markets that are not suited to a company of the size and with the rich assets of ZCCM-IH, when it could be listed on markets that would give it a much better image and value. The right market for ZCCM-IH is the AIM in London. ZCCM-IH should first take all the steps to ensure that the company is correctly valued before considering any share issue of any kind. The board is acting against the interests of good financial management of the company and therefore against the interests of all the shareholders and the owners of the company, the Zambian people. The questionable nature of the Club de Paris debt More than $300 million of the debt in the accounts of ZCCM-IH concerns an interest-free loan granted through an international organisation called the Club de Paris to the Republic of Zambia 6

and transferred to ZCCM-IH. In 2005, the Club de Paris countries unconditionally cancelled this loan along with a much larger loan to Zambia in a measure of goodwill to reduce the burden on heavily indebted countries. This $300m loan did not originate from the GRZ and will never have to be paid back to the creditor countries who lent it. In the interests of equity and as a gesture of goodwill to enable ZCCM-IH to reinvest in future projects for the well-being of the country, ZCCM-IH would be fully justified to ask its majority shareholder, the Republic of Zambia, to abandon at least part of this loan. Instead, the Direction of ZCCM-IH has proposed unilaterally to raise money through a rights issue of new shares to repay a loan that the GRZ never made in the first place. It is clear from this proposal that the direction of ZCCM-IH leans heavily in favour of the government in office rather than defending the interests of ZCCM-IH and the Zambian people. It is not surprising that ZCCM-IH performs so badly when its direction fails to defend the interests of the company. Furthermore, in order to achieve this doubtful goal, the direction of ZCCM-IH has demonstrated its willingness to break the rules of good corporate governance by blocking the participation of independent shareholders at the company's General Meetings and excluding the only independent board member who could oppose or make public the deal.

3) Conflict of Interest and Misconduct

There is a clear conflict of interest between the appointment of seven board members by the acting majority shareholder and the power of this same Board to interfere in the process of nomination of the only member to represent the independent shareholders on the Board. This has been demonstrated by three remarkable events: the Company's decision to interfere in the election of the board member to represent the minority shareholders by restricting the voting rights of 96% of them, the subsequent decision of the Board to restrict its own membership to the exclusive representation of the unique shareholder who appointed them, the decision by this restricted Board to organise a financial deal against the interests of all the historical shareholders (The Republic of Zambia and the Independent shareholders) whilst excluding the independent representative from the Board. By restricting the voting rights of 96% of the voting members and then deferring the nomination process to ensure that the representative of the minority shareholders was excluded from the board until after this conversion is completed, the board has ensured that it maintains a free hand to negotiate in secret the most favourable terms of the deal. In short, we believe that the seven-member board of directors has abused its position by organising a major financial transaction for which the cash benefactor will be the shareholder they represent, whilst simultaneously barring the only independent representative from the board. The independent shareholders firmly believe that any decision by this one-sided board to issue new shares against the will of the independent shareholders goes against the rules of good corporate governance. The appointment of a truly independent board member is the only guarantee of transparency for application of good governance of this jewel of the Zambian Republic. By organising a major financial deal in which the cash benefactor is the government in office that appointed them, whilst simultaneously engineering the exclusion of the only independent representative of the other shareholders, the board has singularly failed in its duty defend the interests of all the shareholders. 7

In the light of these revelations, the minority shareholders of ZCCM-IH formally ask the Securities and Exchange Commission to investigate the actions of the Company Secretary, the Executive Chairman and the Board of ZCCM-IH for possible misconduct in relation to: 1) Discrimination against 96% of the minority shareholders by the use of a Register or Members that fails to provide equal rights for attendance at General Meetings and votes organised by a public company quoted on the LuSE. 2) Interference in the vote to nominate the representative of the minority shareholders by the directors of ZCCM-IH and failure to publish the result. 3) Improper deferral of the nomination of the Board Member to represent the Minority Shareholders motivated by the aim to keep 100% of the Board in the control of a single shareholder until the completion of a financial deal concerning all the shareholders. 4) The organisation of a major financial deal by the Board representing only the acting majority shareholder together with the simultaneous exclusion of the independent board member to represent the remaining shareholders. We look forward to your reply and to your urgent action with respect to this matter. Yours sincerely, The Independent Shareholders of ZCCM-IH email : zambia.shareholder@gmail.com
This letter was compiled and signed by the following 70 UK, French and Belgian shareholders who hold valid documents certifying to their shareholding. They thank you for taking the time and effort to read this long text. Mr Denis Astier Mr Philippe Badaroux Mrs Christiane Bach Mr Raymond Balducci Mr Philippe Berthonnau Mr Philippe Bibard Mr Meyer Bitter Mrs Suzanne Boivin Mr Alexander Bonnar Mr Sylvain Boulet-Gercourt Mr Regis Bugmann Mr Michel Bury Mr B. Bupas Mr Cyrille Caron Mr Philippe Coulonges Mrs Marie-Thrse Coulonges Mr Olivier Cretois Mr and Mrs Thierry Charles Mr Pascal Charles Mr Micheal Charles Mr Michael Coulson Mr Olivier David Mr Jean-Pierre Dramaix Mr Yves Droual Mr B Dupass Mrs Virgine Erhetsmann Mr Franois Fraissignes Mr Michel Francioli Mr Marcel Fron Mme Marie Fumery Mr Joseph Gamet Mr Michel Gauthier Mr Fabrice Girard Mr Yves Goering Mr Didier Goubin Mr Armand Guy Mrs Isolde Harbich Mr Frdrique Huyghe Mr Pierre F Juster Mr Thierry Klump Mr Jean-Marc Legros Mr Laurent Littiere Mr & Mrs Albert Van Luchene Mrs Franoise Mocaer Mrs Aurore Mocaer Mrs Solne Mocaer Mr Olivier Matrat Mr Frdric Michel Mr Herv Morice Mrs Simone Morice Mr Jean Paolini Mr Franois Poirot Mr Grard du Peloux Mr Philippe Sebbah Socit FONTIR Socit SCAMAS Socit SCAMASSII Mr Y Le Strat Mr Christophe Strugula Mrs Celine Sudre Mr Patrick Sudre Mr Philippe Sudre Mr Michael Terrier Mr Thiboust Mrs Corinne Tissie Mr Hubert Traub Mr Christophe Varvois Mr Andr Vincent Mr Albert Wright

Further reading :

http://fr.scribd.com/doc/143831409/ZCCM-IH-Open-Letter-to-Vice-President-Guy-Scott http://fr.scribd.com/doc/150412186/ZCCM-IH-Register-Unfit-for-Purpose