Eastern Property Holdings : Corporate Governanc...

Eastern Property Holdings Limited (EPH) /
Eastern Property Holdings : Corporate Governance Update
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Dear All,

Please find attached an update on EPH's corporate governance to present recent
developments ahead of our AGM on Tuesday 21 June. Please do not hesitate to
contact Terry Olin on [e-mail] or [phone] for further details.



Corporate Governance Update

Response to Requests from Storm Real Estate ASA

17 June 2011

Storm Real Estate ASA ("Storm Real Estate"), a significant shareholder in
Eastern Property Holdings Limited ("EPH"), has recently made a number of
statements in relation to EPH's corporate governance. EPH welcomes the active
involvement of shareholders and EPH management has engaged in a detailed
dialogue with Storm Real Estate about their requests and concerns through face-
to-face meetings, calls and written correspondence over several months. The
purpose of this Corporate Governance Update is to enable all shareholders to
benefit from this dialogue by addressing the issues raised. We look forward to
also discussing a number of these issues with our shareholders at this year's
Annual General Meeting which will be held in London on 21 June.

Storm Real Estate is a Norwegian company which, like Eastern Property Holdings,
is focused on property and property-related investments in Russia. It has
accumulated a significant stake in Eastern Property Holdings (EPH). On 14 April
2011, Storm Real Estate announced that their holding was in excess of 10%.

1. Inclusion of Items on the AGM Agenda

  * Shareholders holding 10% or more of EPH's voting shares may request
    additions to the agenda of the EPH's Annual General Meeting ("AGM"), as
    stated in our Articles of Association and the Corporate Governance sections
    of our Annual and Semi-Annual Reports.
  * Storm Real Estate demanded that a wide range of items be added to the agenda
    of this year's AGM.
  * The board of directors should consider requests from minority shareholders
    to add items to the AGM agenda, (the "AGM Agenda"), but, contrary to a
    statement in a Storm Real Estate press release dated 1 June 2011, is under
    no obligation to accept the requests and put items on the agenda exactly as
    written, or at all. The board of directors has considered each of Storm Real
    Estate's requests in good faith.
  * Some of Storm Real Estate's proposed agenda items have been reflected in the
    AGM Agenda. A further series of requests were deemed more appropriately
    dealt with as questions to the AGM.
  * Other requests specifically relate to the day-to-day management and
    operation of EPH. While these matters may be discussed at the AGM, they fall
    properly within the competence of the executive management rather than of
    the shareholders and the directors.


2. Board of Directors

Storm Real Estate proposed a number of amendments to EPH's Articles of
Association which concern the composition, term, eligibility, election,
remuneration, voting, removal and activities of the board. A number of these
matters will be addressed at the AGM (Agenda Items 5, 6,7, 9 and 10).

Conflicts of Interest

  * Given EPH's structure - EPH is managed by a subsidiary of Valartis Group,
    which is also the largest shareholder - it is particularly important that
    conflicts of interest are recognized and managed.
  * Item 7) of the AGM Agenda proposes that directors with an interest in a
    transaction be precluded from voting on the matter.
  * A number of other proposals from Storm Real Estate seem to address the risk
    that a decision might be made in favor of Valartis Group because executive
    board members are in the majority, or have the casting vote at a particular
    board meeting. We believe that preventing directors with an interest in a
    transaction from voting on the matter and electing additional independent
    non-executive directors to the board effectively addresses this concern.


Board Composition

  * The Board of Directors of EPH currently consists of two executive board
    members from our largest shareholder, Valartis Group, and two independent
    non-executive directors.
  * Storm Real Estate has recommended that "the majority of shareholder elected
    members of the Board of Directors must be independent of the EPH's major
    shareholder/management company".
  * Items 9) and 10) of the AGM Agenda propose that two new independent non-
    executive directors be appointed to the board. The board will then have a
    majority of independent directors.
  * Both proposed independent non-executive directors - Bernard Sucher and
    Kirill Rubinsky - are well-known and respected business leaders with
    relevant experience and deep knowledge of our market. Their candidacy
    statements are available on the EPH website.


Term of Board Members

  * Currently, EPH's Articles of Association do not impose a maximum term for
    board members.
  * A three-year limit with the potential for re-election is now proposed. The
    term limitation would also apply to the current board.
  * Storm Real Estate further proposed that half of the directors should retire
    by rotation at each AGM. EPH believes that it and the shareholders benefit
    from the continuity of the board of directors in a business characterized by
    long lead times and complex multi-year commitments.
  * The term limit for directors is raised in Items 5) and 6) of the AGM Agenda.


Election of Board Members

  * Directors are currently elected by the shareholders. Storm Real Estate
    proposes that directors should also be able to appoint other directors
    provided that the appointment is approved by shareholders at an EGM within
    3 weeks of the appointment.
  * We believe that since a shareholder meeting is required in either case, the
    proposal has limited practical impact.
  * Storm Real Estate further proposed that EPH create a Nomination Committee,
    composed of representatives of each of the five largest shareholders. This
    Nomination Committee would propose candidates for director and their
    remuneration.
  * Nomination and Remuneration Committees are generally composed of board
    members. While our board may choose to appoint committees amongst
    themselves, we do not believe it is detrimental to EPH if they address these
    matters as a body that recognizes and managed potential conflicts of
    interest.


Removal of Directors

  * Storm Real Estate stated in their press release of 1 June 2011 that a 75%
    shareholder resolution is needed to change an elected board member.
  * That is incorrect. As per the EPH's Articles of Association, a director may
    be removed, with or without cause, by a simple majority at a shareholders'
    meeting called for purposes including the removal of the director, or
    without a shareholder's meeting by a written shareholder resolution passed
    by at least seventy-five percent of the shareholders of EPH entitled to
    vote.
  * Storm Real Estate has proposed amendments to our Articles on the subject of
    removing directors, seemingly based on an incorrect understanding of the
    current Articles. The proposed wording is more lengthy and detailed than the
    wording of the current provision and at present, the board does not believe
    these amendments would have any practical impact.


Quorum for Board of Directors

  * Currently, the quorum is not less than half the total number of directors.
    If there are only two directors, the quorum is two. The Chairman has a
    casting vote in the case of any equality of votes.
  * Storm Real Estate proposed that the quorum be a majority of independent
    directors, or an equal number of independent and non-independent directors
    plus the Chairman (who, under Storm's proposals, is assumed to be
    independent).
  * Having considered Storm's proposal, the board believes it is in EPH's best
    interests not to make the convening of board meetings unnecessarily onerous.


Chairman of the Board

  * Currently, the Chairman of the Board can be either independent or non-
    independent. The Chairman has a casting vote in the case of any equality of
    votes.
  * Storm Real Estate proposes that the Chairman must be an independent
    director.
  * EPH's view is that, given a) the plan to add two further independent
    directors to the board, and b) that board members, including the Chairman,
    cannot vote on transactions in which they have an interest, it is not
    necessary for the Chairman also to be independent.


Written Resolutions of the Directors

  * Currently, a written resolution must be signed by a majority of the
    directors. In the case of a committee decision, all members of the committee
    must sign.
  * Storm Real Estate proposed that, in addition to the requirement that a
    majority of the directors sign, a majority of those signatories must be
    independent directors.
  * Agenda item 7) prohibits a director from voting on any matter in which he is
    interested. As a result, the board's view is that the proposed resolution
    would have no material effect.


Directors' Remuneration

  * Currently, the remuneration of directors is decided by a resolution of the
    directors. Storm Real Estate proposes that remuneration of directors be
    decided by a resolution of the shareholders.
  * Directors who are also officers of Valartis Group are not eligible for any
    compensation as board members. The board as a whole will agree upon
    remuneration for independent board members.


Eligibility of Directors

  * As per EPH's Articles, a competitor, or person directly or indirectly
    employed by a competitor, cannot be appointed to the board of directors. A
    "competitor" is defined as any entity competing for properties, projects or
    tenants with EPH, or engaged in substantially the same business in the same
    geographic region as EPH.
  * Storm Real Estate, a competitor which is in substantially the same business
    in exactly the same geographic area, proposed the removal of this
    restriction.
  * The board of directors decided that this proposal was not in the best
    interest of EPH or its shareholders.


3. Introduction of SESTA corporate takeover rules

  * Storm Real Estate requested that EPH adopt the rules on corporate takeovers
    of the Swiss Federal Act on Stock Exchange and Securities Trading (SESTA).
    The Swiss takeover rules contain three key elements:
    1.  A regime mandating disclosure of significant shareholdings;
    2.  A regime regarding voluntary takeover offers; and
    3.  A mandatory offer regime.

  * EPH is incorporated in BVI and listed on SIX as a foreign company. As such,
    it does not generally fall under SESTA. Regulation by request is not
    possible.
  * An alternative approach is to introduce similar rules via EPH's Articles of
    Association.
  * Of the three SESTA takeover elements, the rules mandating disclosure of
    significant shareholders are most easily implemented by amendment to the
    Articles. The AGM Agenda proposes reporting by shareholders as certain
    thresholds are crossed, either due to buying or selling of shares. Patterned
    after SESTA rules, failure to report would be enforced by denial of voting
    rights for a period of up to the SESTA standard of five years.
  * EPH's ability to enforce rules regarding voluntary or mandatory takeover
    would be limited as the Articles of Association are only enforceable against
    shareholders. While it would be possible to withhold rights on shares, it is
    not necessary, for example to a shareholder to make a voluntary takeover
    offer. As such, we have not proposed rules which could only be enforced
    against shareholders, while being potentially ignored by non-shareholders.
  * Based on our conversations with investors, we understand that they are
    primarily concerned with the risk that, without warning, an investor could
    acquire control of EPH and, depending on the investor, potentially change
    EPH's risk profile. Proposed Notification rules requiring disclosure of
    dealings in shares are found in Item 8 of the AGM Agenda.


4. Quarterly Reporting

  * Storm Real Estate requested that EPH publish its results quarterly, rather
    than semi-annually.
  * EPH welcomes this proposal and proposes to start publishing results on a
    quarterly basis. The first quarterly report, covering Q1 2011, will be
    presented at the AGM. Subsequent quarterly reports are expected to be
    published within 60 days of the end of the quarter. The quarterly reports
    will include updates on construction progress, rental receipts and any other
    significant news.


5. Valuation of assets

  * Assets held at fair value will continue to be re-valued twice per year.
  * EPH has always used appraisals of its real estate assets prepared by
    international property consultants. The assumptions and methodologies used
    by the appraisers are also checked by our auditors. We will engage a
    different international consultant to perform appraisals starting 30 June
    2011. As such, two different international appraisers will have opined on
    each of EPH's real estate assets within a six month period.


6. Management Agreement

  * Storm Real Estate requested that the Management Agreement between EPH and
    Valartis International Ltd be made public before the AGM.
  * All material commercial terms of EPH's Management Agreement are publically
    available on page 34 of EPH's 2011 Annual Report, in accordance with the SIX
    Listing Rules.


7. Management Fee

  * The management of EPH has been delegated to Valartis International, a wholly
    owned subsidiary of Valartis Group AG.
  * Valartis International is currently entitled to fees as follows:

      * Management Fee of 2 % of EPH's adjusted Net Asset Value ("NAV"). The
        Management Fee includes the remuneration for the Management Committee.
      * Performance Fee equal to 15 % of the value appreciation of EPH's
        properties and property developments.

  * If Valartis Group provides any other services not included in the Management
    Fee, for example property management, they are provided at cost.
  * Fees paid or provisioned under the Management Agreement are verified as
    being correctly calculated by EPH's auditors.
  * Storm Real Estate has proposed that the Performance Fee should be aligned to
    EPH's share price rather than NAV.
  * EPH believes that management's primary focus should be creation of value,
    which is reflected in the NAV. Focusing management's attention on share
    price - a short term indicator of market sentiment - would seem to be
    especially inappropriate for a company in the inherently long-term business
    of owning and developing real estate.


8. Disclosure and Transparency

  * Storm Real Estate has made a number of helpful proposals in relation to
    EPH's communication with shareholders and the public. EPH welcomes these
    suggestions and, in response, is introducing the steps below.
  * In addition to quarterly reporting, EPH proposes to organise a quarterly
    conference call for shareholders with management. This will create at least
    two extra opportunities each year for investors to interact with management.
  * A link to the SIX page detailing management transactions will be added to
    the EPH website, so that recent and historical transactions can easily be
    reviewed.
  * Dividend policy - EPH's dividend policy remains unchanged: we will pay up to
    90% of disposable net rental income as a dividend each year. In recent
    years, when equity and debt financing were largely unavailable, and
    construction of Geneva House underway, it has not been possible to consider
    any of EPH's net rental income to be disposable.


9. Share Dealing

  * The SIX Listing Rules require directors and management to report any
    transactions in EPH shares, whether on their own account, or in relation to
    accounts over which they may reasonably be expected to have an influence.
  * Storm Real Estate has proposed additional information and timing
    requirements on EPH.
  * EPH's directors believe that the SIX Listing Rules requirements are
    reasonable, and provide the key information as to whether management or
    entities related to management are actively buying or selling shares.


10. Treasury Shares

  * Storm Real Estate has proposed that all issued treasury shares are cancelled
    once they exceed 5% of total issued shares.
  * Treasury shares provide flexibility in terms of financing possible
    acquisitions and other transactions, making them a potentially useful asset
    of EPH. The rationale for the proposed cancellation is arbitrary and
    unclear.
  * EPH can only buy its own shares or sell its treasury shares by decision of
    the board of directors.



*********

Eastern Property Holdings Ltd. is an SIX Swiss Exchange-listed real estate
development company focusing on Russia. EPH holds interests in office,
residential, retail and parking properties and developments, principally in
Moscow and St. Petersburg. EPH is managed by Valartis International Ltd. a
wholly-owned subsidiary of Valartis Group AG. Additional information on Eastern
Property Holdings is available by contacting Terry Olin, Tel: [phone].

*********


 --- End of Message --- 

Eastern Property Holdings Limited (EPH)
Valartis Asset Management SA/Case Postale 3458 Geneva Switzerland

WKN: 250817;ISIN: VGG290991014;

Corporate Governance Update (PDF): 


http://hugin.info/139905/R/1524446/460252.pdf

Candidate Statements for Independent Non-Executive Directors (PDF): 


http://hugin.info/139905/R/1524446/460251.pdf




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