PAL.L Regulatory News (PAL)

18 May 2020

EQUATORIAL PALM OIL plc

("EPO" or the "Company")

Proposed Disposal of 50% interest in LPD and Notice of General Meeting

Equatorial Palm Oil plc (AIM: PAL), the AIM listed palm oil development and production company with operations in Liberia, West Africa, announces the proposed disposal, by its wholly owned subsidiary Equatorial Biofuels (Guernsey) Limited ("Equatorial Biofuels"), of the Company's 50 per cent. interest in Liberian Palm Developments Limited ("LPD") to Kuala Lumpur Kepong Berhad ("KLK") for nominal consideration (the "Disposal").

Overview of the Proposed Disposal

· Under the terms of the SPA, on completion of the proposed Disposal:

o Equatorial Biofuels will transfer its 50 per cent. equity interest in LPD to KLK Agro Plantations Pte Ltd ("KLK Agro Plantations"), a wholly owned subsidiary of KLK ("Sale Shares")

o EPO will transfer its circa US$6.2m of outstanding debt owed to EPO by LPD ("Loan Novation"), which ranks behind LPD's outstanding loans with KLK of circa US$131m, to KLK Agro Plantations

o The consideration for the transfer of the Sale Shares and Loan Novation shall be £1

· The proposed Disposal constitutes a fundamental change of business of the Company under Rule 15 of the AIM Rules and accordingly requires shareholder approval. If approved, the Company would become an AIM Rule 15 cash shell on completion.

· The proposed Disposal will eliminate any future costs to the Company associated with its interest in LPD and enable the Board to seek to acquire another asset which the Board believes is more likely to generate value for Shareholders in the near to medium term.

· On completion, the Company expects to have available cash resources of approximately £800,000, which the Board will utilise carefully in seeking to identify and execute a potential acquisition.

Further information regarding the proposed Disposal can be found below and in a Circular which will shortly be posted to shareholders and made available on the Company's website at www.epoil.co.uk (the "Circular").

The proposed Disposal is subject to shareholder approval at General Meeting of the Company to be held on 9 June 2020 at 11:00 a.m. Notice of the General Meeting and further information regarding voting and attendance is provided within the Circular.

Michael Frayne, Executive Chairman of EPO, commented:

"The last few years have proved to be a very difficult time for the palm oil industry in Liberia, and worldwide, which as shareholders will be aware has significantly impacted the Group's ability to develop its palm plantations at the rate we would have hoped. Indeed, last year we announced that Butaw estate would cease operations as it was not economically viable to continue.

"Having extensively considered the proposed Disposal, I, and Geoff Brown, believe that it is in the best interests of shareholders for EPO now to dispose of its interest in LPD and seek to utilize its cash reserves, of approximately £800,000 expected on completion of the proposed Disposal, to seek to acquire another asset which can deliver value generation for shareholders in the near to medium term."

- END -

For further information, please visit www.epoil.co.uk or contact:

Additional Information

1. Meeting Arrangements and Expected Timetable

The General Meeting of the Company will be held at 11:00 am on 9 June 2020. The physical meeting will be held at 8th Floor, The Broadgate Tower, 20 Primrose Street, London EC2A 2EW but please note the instructions set out in this announcement and the Notice of General Meeting with respect to the arrangements in place for this meeting. Unfortunately, due to COVID-19, no Shareholder will be allowed entry into the physical meeting.

As a result of the ongoing COVID-19 pandemic, and in line with the Government's Stay at Home Measures, the Board is adopting a number of changes to the traditional running of the General Meeting. In order to reduce the risk of infection we are asking Shareholders to not attend the General Meeting which will end immediately following the formal business. Any Shareholders who do attend will not be admitted.

Arrangements will be made by the Company to satisfy the requirements of a quorum for the General Meeting so that it may proceed.

ONLY THE CHAIRMAN CAN BE APPOINTED AS A SHAREHOLDER'S PROXY FOR THIS PARTICULAR MEETING AND IN ADDITION SHAREHOLDERS CANNOT ATTEND THIS MEETING IN PERSON.

Shareholders will be able to submit questions ahead of the General Meeting. Only questions in relation to the Resolution or business of the General Meeting will be considered for the purposes of the General Meeting. Shareholders should direct questions to Ben.Harber@shma.co.uk. Where appropriate and practicable, answers to these questions will be posted on the Company's website following the meeting.

EXPECTED TIMETABLE OF PRINCIPAL EVENTS

Notes:

Unless otherwise specified, references in this announcement to time are to London time.

The times and dates above are indicative only. If there is any change, revised times and/or dates will be notified to Shareholders by means of an announcement through a Regulatory Information Service.

2. Business of the General Meeting

This announcement sets out details of the proposed Disposal by the Company's wholly owned subsidiary, Equatorial Biofuels, of its 50 per cent. equity interest in LPD, the Group's operating subsidiary, to KLK Agro Plantations, a wholly owned subsidiary of KLK, for nominal consideration.

The Disposal, if concluded, will constitute a fundamental change of business of the Company under Rule 15 of the AIM Rules. On completion of the Disposal, the Company would cease to own, control or conduct all, or substantially all, of its existing trading business activities or assets. Accordingly, should the Disposal complete, the Company would be classified as an AIM Rule 15 cash shell and, as such, would be required to make an acquisition or acquisitions which constitute a reverse takeover under AIM Rule 14 (or seek re-admission as an investing company (as defined under the AIM Rules)), on or before the date falling six months from completion of the Disposal, failing which, the Company's Ordinary Shares would be suspended from trading on AIM pursuant to AIM Rule 40. Admission of the Company's Ordinary Shares to trading on AIM would be cancelled six months from the date of suspension should the Company not complete such a transaction during this time.

The purpose of this announcement is to set out the background and reasons for the Proposal, explain why the Independent Directors believe that it is in the best interest of the Company and Shareholders as a whole and why the Independent Directors recommend that Shareholders should vote in favour of the Resolution to be put to Shareholders at the General Meeting.

3. Background to Proposal

On 29 November 2013, KLK, via KLKI, completed a subscription for Ordinary Shares which led to the requirement for it to make a mandatory cash offer to all other Shareholders to acquire the entire issued and to be issued share capital of the Company. The offer completed on 23 December 2013 and resulted in KLK holding 223,866,969 Ordinary Shares in the Company, representing 63.2 per cent. of the Company's then issued share capital. Since the completion of its offer, the KLK group has loaned circa US$131 million of funding to LPD pursuant to the KLK Loan, and it has managed the operations of LPD in Liberia, through Taiko Plantations Sdn. Bhd., a wholly owned subsidiary of KLK.

LPD, through its wholly owned subsidiaries in Liberia, holds concessions to the Palm Bay and Butaw palm oil estates in Liberia, West Africa, granted for 50 years, The Palm Bay estate comprises 13,007 hectares of land as part of the concession, as well as expansion areas totalling 20,234 hectares, of which 50 per cent. is set aside for out grower programmes. The Butaw estate comprises 8,011 hectares of land as part of the concession, as well as expansion areas totalling 46,539 hectares, of which 15,680 hectares is set aside for out grower programmes.

Whilst progress has been made at the Palm Bay estate during the period of the Company's involvement, including the commissioning of a palm oil mill and subsequently the first sale of its palm oil products, together with the completion of a 3,000MT storage tank facility and the first shipment of CPO produced by the Company from the port of Buchanan in September 2019, there have unfortunately been a number of corporate and operational impediments to the optimal development of the Group's plantation assets. As was announced in the Company's full year accounts for the year ended 30 September 2019, Butaw was considered to be uneconomic as a standalone concession and the decision was made by the Board of LPD to fully impair its value in the accounts for LPD. As a result, the operations at Butaw have ceased. The Company has also made an impairment of its investment in its subsidiary, Equatorial Biofuels, of US$15,842,000, which is now reflected in the full year results ending 30 September 2019 and which results in reducing the carrying value of its investment to nil.

LPD is currently loss making, has outstanding debt to KLK of c.$131m which ranks ahead of the Company's loans to LPD in the amount of c.$6.2m, and is likely to require further funding going forward. Consequently, it is highly unlikely that the Company's loans to LPD will be recoverable. Accordingly, the Independent Directors believe that there is little prospect of generating value for Shareholders from the Company's interest in LPD.

Planting Rate

The Company's original strategy was to plant between 3,000 and 5,000 hectares per annum across its two concessions in Liberia. However, the development and planting rate in Liberia has been slower for a number of reasons including, inter alia, the Ebola virus epidemic in 2015, the introduction of the new planting procedures and the global down turn in the natural resources industry.

In 2015, EPO, through its JV partner KLK, signed up to the "No De-Forestation" commitment which is set out in new procedures and policies for developing new lands for oil palm development by the Company. This included a moratorium on the development of new lands for oil palm development until 1) certain scientific studies were completed and 2) studies and assessment of these lands were completed using the policies and procedures. These include, inter alia, implementation of Free, Prior and Informed Consent ("FPIC"), High Carbon Stock ("HCS") and High Conservation Value ("HCV") assessments. Both the HCS and HCV approaches include guidance on social best practice or social components, while FPIC is a tool for ensuring social safeguards exist in new land development.

The above commitments and the Roundtable on Sustainable Palm Oil and New Planting Procedures, which EPO also committed to, resulted in a slowdown in the development of new lands for oil palm development whilst such studies and assessments are undertaken.

As such, in Liberia, on both Palm Bay and Butaw estates, there has been very little land development, and consequently planting of new oil palms, since the introduction of the moratorium in 2015.

Funding

Since December 2013, as noted above, the KLK group has provided significant funding to LPD, comprising loans of US$2.0 million, US$20.5 million, US$30 million, US$30 million and US$20 million, and equity funding of US$7.5 million, for the development of LPD's oil palm assets in Liberia. In addition, EPO has provided funding of US$6.2m to LPD by way of the EPO Loans, such loans ranking behind those provided by KLK. Notwithstanding the minimal land development work currently being carried out, in-country expenditure (excluding any capital requirements associated with the mill and / or port facilities) is approximately US$1 million per month.

In addition, the Directors anticipate that LPD, in the medium term, will require further funding in excess of the revenues generated by the recently commissioned Palm Bay palm oil mill in order to support the development of its business.

Whilst KLK has been supportive to date in providing the necessary funding to develop the Group's operations, there can be no certainty that KLK will continue to provide such funding. At the same time, having consulted its advisers, the Board believes that it would be extremely unlikely that the Company would be able to raise sufficient funding from the equity markets or via the issue of debt given the current economic climate, and the already heavily indebted nature of LPD, to enable EPO to contribute towards the funding required by LPD. Accordingly, EPO remains reliant on the continued provision of funding from KLK, without which the ongoing development of its assets would be significantly hindered.

In addition to the above, the Independent Directors are conscious of the fact that for the non KLK shareholders, the low free float of the Company has resulted in little trading activity and therefore little opportunity to realise value from an illiquid asset.

In light of KLK's offer to acquire the Company's interest in LPD and having considered the alternative options from the perspective of all Shareholders, the Independent Directors have concluded, in consultation with the Company's other major Shareholders and its advisers, that the best option for Shareholders is to seek to conclude the Disposal. In reaching this conclusion, the Independent Directors have taken into account an independent third-party valuation of LPD, undertaken for the benefit of the deliberations of the Independent Directors, and have undertaken a thorough internal review of all potential alternative options. In addition, the Independent Directors are of the view that the Disposal represents the best means by which the Company can eliminate any future obligations in relation to its interest in LPD, thereby enabling the Board to progress the identification of a suitable asset for acquisition which has the potential to generate value for shareholders in the near to medium term.

After completion of the Disposal and with the final reimbursement of attributable expenditure from LPD, estimated to be approximately £300,000, the Directors anticipate that the Company will have funds of approximately £800,000 available to provide ongoing working capital and to allow for the assessment of acquisition opportunities.

4. Summary of the SPA

Equatorial Biofuels, KLK Agro Plantations, KLK and the Company have entered into the SPA, pursuant to which Equatorial Biofuels and the Company have agreed to sell the 50 per cent. interest in LPD held by Equatorial Biofuels to KLK Agro Plantations and novate the EPO Loan to KLK Agro Plantations in consideration for the payment of £1 by KLK Agro Plantations to Equatorial Biofuels.

On the Completion Date, LPD will pay EPO, in aggregate, approximately £300,000 in respect of agreed invoices and the reimbursement of certain expenses in connection with the Disposal.

Completion of the Disposal is conditional upon the approval by Shareholders of Resolution 1 at the General Meeting.

Information on KLK

KLK is amongst the largest plantation companies in Malaysia with plantations, located in Peninsular Malaysia, Sabah and in Indonesia, more specifically Sumatra, Belitung Island, central and east Kalimantan. KLK is also one of the largest manufacturers of renewable palm-based oleochemical products and derivatives in the oleochemical industry. KLK began as a plantation company more than 110 years ago and is now listed on the Main Market of Bursa Malaysia Securities Berhad with a market capitalisation of approximately £4.2 billion (as at 30 April 2020).

5. AIM Rule 15

In accordance with AIM Rule 15, the Disposal constitutes a fundamental change of business of the Company. On Completion, the Company would cease to own, control or conduct all or substantially all, of its existing trading business, activities or assets.

Following completion of the Disposal therefore, the Company will become an AIM Rule 15 cash shell and as such will be required to make an acquisition or acquisitions which constitutes a reverse takeover under AIM Rule 14 (including seeking re-admission as an investing company (as defined under the AIM Rules) which requires the raising of at least £6 million) on or before the date falling six months from completion of the Disposal, failing which the Company's Ordinary Shares would then be suspended from trading on AIM pursuant to AIM Rule 40. Admission to trading on AIM would be cancelled six months from the date of suspension should the reason for the suspension not have been rectified.

Accordingly, should the Disposal complete, the Company will become an AIM Rule 15 cash shell and will continue to evaluate appropriate opportunities in the sectors the Board considers appropriate seeking to identify one or more projects or assets which the Company can acquire, which would constitute a reverse takeover under AIM Rule 14.

Following completion of the Disposal and reimbursement of invoices and expenses in an amount of approximately £300,000, the Group is expected to have available cash resources of approximately £800,000 with no other material assets or material outstanding liabilities.

6. Related Party Transaction

KLK, through its wholly owned subsidiaries, KLK Agro Plantations and KLKI, currently holds 50 per cent. of the issued share capital of LPD and 223,959,702 Ordinary Shares in the Company, representing approximately 62.86 per cent. of the Issued Share Capital of the Company. In addition, Mr Lee Oi Hian, Mr Patrick Kee Chuan Peng, Ms Yap Miow Kien and Mr Lee Guo Zhang, are all Directors of the Company and are also either Directors (Mr Lee Oi Hian) or employees (Mr Patrick Kee Chuan Peng, Ms Yap Miow Kien and Mr Lee Guo Zhang) of KLK.

Accordingly, the Disposal constitutes a related party transaction under Rule 13 of the AIM Rules by virtue of the commonality in the share ownership structure and management boards of KLK and the Company.

Michael Frayne and Geoffrey Brown, being the Independent Directors for the purposes of AIM Rule 13, having consulted with the Nominated Adviser, consider that the terms of the Disposal are fair and reasonable insofar the Shareholders are concerned.

As set out above, the Independent Directors have sought to consider all possible alternative options in light of the Company's circumstances and have commissioned an independent valuation report on LPD in order to support their considerations as to the merits of the Disposal; having done so, they are of the view that the Disposal represents the best means by which the Company can eliminate any future obligations in relation to its interest in LPD and will enable to Board to progress the identification of a suitable asset for acquisition which has the potential to generate value for shareholders in the near to medium term.

7. The Board 

It is currently expected that the Board of the Company will remain unchanged following Completion of the Disposal.

KLK and its appointees on the Board have indicated their support for the Company retaining the listing of its Ordinary Shares on AIM and pursuing a strategy to identify and acquire a suitable asset for future development.

8. General Meeting

The Notice convening the General Meeting to be held at 8th Floor, The Broadgate Tower, 20 Primrose Street, London EC2A 2EW, at 11:00 a.m. on 9 June 2020 at which the Resolution will be proposed has been sent to Shareholders. The following resolution is to be proposed at the General Meeting:

Resolution 1 - To approve the Disposal

Resolution 1, which will be proposed as an ordinary resolution, seeking approval of the Disposal pursuant to the terms of the SPA and as required under Rule 15 of the AIM Rules.

9. Action to be taken in respect of the General Meeting

Shareholders are encouraged to complete the Form of Proxy enclosed within the Circular sent to Shareholders. The Board requests that no Shareholders attend the meeting. Any Shareholders that do attend will be refused entry.

To be valid, completed Forms of Proxy must be received by the Company's registrars, Share Registrars Limited, at 1st Floor, 9 Lion and Lamb Yard, Farnham, Surrey GU9 7LL, not later than 11 a.m. on 5 June 2020, being 48 hours before the time appointed for holding the General Meeting.

Shareholders are entitled to appoint a proxy to attend and to exercise all or any of their rights to vote and to speak at the General Meeting.

ONLY THE CHAIRMAN CAN BE APPOINTED AS A SHAREHOLDER'S PROXY FOR THIS PARTICULAR MEETING AND IN ADDITION SHAREHOLDERS CANNOT ATTEND THIS MEETING IN PERSON.

10. Recommendation

The Independent Directors, having consulted with the Nominated Adviser, consider the terms of the Disposal to be fair and reasonable in so far as shareholders are concerned. The Independent Directors also believe the Disposal to be in the best interests of the Shareholders as a whole.

Accordingly, the Independent Directors recommend that Shareholders vote in favour of the Resolution to be proposed at the General Meeting as they intend to do in respect of their own beneficial holdings of 528,957 Ordinary Shares in aggregate representing 0.15 per cent. of the current issued share capital of the Company.

DEFINITIONS

The following definitions apply throughout this announcement, unless the context otherwise requires:

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.