CHAPTER 1 DEAL FORMATION ISSUES IN OIL AND GAS ASSET ACQUISITIONS
| Jurisdiction | United States |
(Nov 1995)
DEAL FORMATION ISSUES IN OIL AND GAS ASSET ACQUISITIONS
Joseph P. McMahon
Davis, Graham & Stubbs, L.L.C.
Denver, Colorado
INDEX
Introduction
§ 1.01 The Goal—A Completely Integrated Purchase and Sale Agreement
[1] A Contract
[2] Enforceability
[a] Specific Performance
[3] Circumstances Surrounding the Agreement
[a] Parol Evidence
[4] Contract Based on Correspondence, Informal Communication, or Conduct
[a] Correspondence
[b] Conduct
[5] Contract Formation Paradigms
[6] Summary
§ 1.02 The Essential Terms of the Deal
[1] Choice of Entity
[2] The Assets
[a] Conducting Due Diligence, What Level of Effort Is Enough?
[b] Primary Due Diligence Areas
[c] Data Rooms
[3] Financing
§ 1.03 Conducting Negotiations and Due Diligence
[1] Composition of the Negotiation Team
[2] Company Policy and Practice
[a] Habit and Routine
[b] Business Records Exception to the Hearsay Rule
[c] Absence of Entry of Business Records
[d] The Importance of Company Policy and Practice
§ 1.04 Precontractual Liabilities—The Middle Ground
[1] Documentation of Your Position in the Middle Ground
§ 1.05 Letters of Intent
[1] Obligations
[2] Clearly Express the Intended Result
[3] Summary
§ 1.06 Miscellaneous Issues
[1] Long-Arm Jurisdiction
[2] Trial Considerations
[a] Burden of Proof
[b] Jury
[c] Mere Signatures Not Enough
———————
[Page 1-1]
Introduction
This paper examines "Deal Formation Issues" related to oil and gas asset acquisitions, or, in more legalistic terms, the issues that arise before the execution of a completely integrated Purchase and Sale Agreement for producing and non-producing oil and gas assets. Although the goal of the Buyer is to purchase and the goal of the Seller is to sell, many issues arise as the parties proceed from concepts, through due diligence, to execution of a completely integrated agreement. The first section of this paper examines the issues surrounding contract formation, which is the ultimate goal of both Buyer and Seller. The second section examines the essential deal terms and how such terms are evaluated by each side. The third section examines issues that arise when negotiating and conducting due diligence. The fourth section examines a very unpredictable area of the law — liabilities and obligations (intended and unintended) that may arise before execution of the final agreement. The fifth section discusses letters of intent and the last section examines several miscellaneous issues.
§ 1.01 The Goal — A Completely Integrated Purchase and Sale Agreement
The goal of deal formation is the execution of a completely integrated "Purchase and Sale Agreement" for producing and for non-producing oil and gas assets ("the "Agreement"). The sections of the Agreement should reflect and adequately address the issues that arise between the parties. Those issues are best identified by examining basic contract law and the requirements for enforceability.
[1] A Contract
Beginning first with the definition of a contract — a contract is a legally binding agreement,2 or a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes the duty.3 The traditional elements of a contract are:
[Page 1-2]
(1) mutual assent or mutual agreement ("meeting of the minds");4
(2) consideration;5
(3) intention to establish a contractual relationship;6
(4) the parties must have the legal capacity to enter into the contract; and
(5) there must be no statute or common law rule that makes the contract void ab initio.
Although the last two elements are important, the issues arising in oil and gas asset acquisitions typically involve the first three elements. The first and third elements are particularly important when analyzing whether a contract is enforceable.
[2] Enforceability
To be enforceable, the parties must intend that the document be binding and, further, the Agreement itself must include all essential terms so that a court can perceive what are the respective rights and obligations of the parties.7 There is no need for perfect certainty or that all terms be fixed and complete for a contract to have legal efficacy;8 courts frequently find enforceable contracts in agreements which do not set forth all terms with optimal specificity.9 A binding contract may be reached even though there are matters remaining to be negotiated.10 But, where further negotiations are necessary to work out essential terms and conditions, a binding agreement does not exist.11 The essential terms of a contract, however, need not be
[Page 1-3]
favorable to both sides. If one party entered into a poor business deal, which it could have provided for, the courts cannot step in and write a new contract to grant it relief.12
[a] Specific Performance
The enforceability standard is raised somewhat if the parties are seeking specific performance. The basic rule is a contract should not only contain all the material terms necessary to make a complete and legal contract, but in a sufficiently exact and definite manner that a court may enforce with reasonable certainty.13 For the granting of specific performance, the contract must be sufficiently certain in its terms to permit the decree to state with some exactness what the defendant must do.14 Specific performance is not a matter of right, but rather, it is granted only where the particular circumstances of the case and well-recognized rules of equity afford it.15 For specific performance, greater certainty and completeness are demanded than for an action for damages.16 "Completeness" denotes a contract which embraces all material terms, "certainty" means each term is expressed in a sufficiently exact and definite manner.17 Even though an Agreement may be too indefinite in its terms to be specifically enforced, it may be certain enough for breach of which damages may be recovered. An action at law is founded on mere non-performance, and a negative conclusion can be established without determining all the terms of the agreement with exactness. A suit in equity is wholly an affirmative proceeding and mere non-performance is not enough; to procure performance demands a clear, definite, and precise understanding of all the terms.18
[3] Circumstances Surrounding the Agreement
The contract should be a clear, "integrated," final expression of the parties' intent. However, in many circumstances, the court will look outside the language of the contract and permit evidence of the surrounding circumstances and prior drafts. When a court construes an integrated, final document established to be a contract, extrinsic evidence is not admissible to
[Page 1-4]
vary the meaning of what is deemed to be an unambiguous document.19 This is what is known as the "Four Corners" Rule — the court need only look within the four corners of the document to ascertain the intent of the parties. Although the contract drafter's goal is a clear, unambiguous expression of the parties' intent — disputes over the meaning of what everyone thought was clear language may occur. When such disputes arise, the court will look beyond the four corners of the document to ascertain the parties' intent. Accordingly, evidence of the parties' conduct, their oral statements, and their writings, and other evidence illuminating the circumstances surrounding the making of an Agreement are admissible as evidence to clarify the intent and purpose of the parties. As a practical matter, the resource company should conduct itself throughout the deal formation process as if the totality of the circumstances, not just the Agreement, will reflect the parties' intent.20 If a dispute arises, and the Agreement is not completely integrated, the parole evidence rule which seeks to preserve the integrity of writers agreements by refusing to permit contracting parties to alter the import of their contract through the use of contemporaneous oral declarations.21
[a] Parol Evidence
Where an Agreement is complete as far as it goes, parts not embraced within its scope may be established by parol.22 If a writing was not intended to be fully integrated, terms other than those set forth may be proved by parol evidence.23 Parol evidence may be used to show the existence of a condition precedent to the obligations of the contract.24 However, parol evidence is inadmissible to prove the existence of a verbal agreement to transfer an interest in real property because such an agreement would be invalid and unfavorable under applicable law.25
[4] Contract Based on Correspondence, Informal Communication, or Conduct
Although the Buyer and Seller likely assume that they are not bound until the formal agreement is executed, contractual obligations may arise based on correspondence or informal communications. The mere fact that parties to an oral or informal agreement intend that the
[Page 1-5]
same shall be reduced to a written or more formal contract will not necessarily prevent present, binding obligations from arising even if the formal contract is never signed.26 Where a future contemplated writing is not a condition precedent to a contract and the parties intend to be bound regardless of a complete writing, a contract must be held to exist.27
[a] Correspondence
Did the parties mean to contract by their correspondence or were they only settling terms of an agreement to be entered into after all its particulars had been adjusted? If letters are merely the basis for the contract, no contract was formed. Whether or not ... depends on circumstances of the particular case.28 In one case, where documents containing the terms claimed by defendants to be material were in the defendants' possession, a fax letter was a binding agreement, not simply an...
To continue reading
Request your trial