CHAPTER 4 NEGOTIATING THE PURCHASE AND SALE AGREEMENT: WORKING TOWARDS AN AGREEMENT: RESPONSIVE PRESENTATIONS AND DISCUSSION
| Jurisdiction | United States |
(May 2006)
NEGOTIATING THE PURCHASE AND SALE AGREEMENT: WORKING TOWARDS AN AGREEMENT: RESPONSIVE PRESENTATIONS AND DISCUSSION
Thompson & Knight LLP
Dallas, Texas and Santa Fe, New Mexico
Jolisa Melton Dobbs
Thompson & Knight LLP
Dallas, Texas
Milam Randolph Pharo
St. Mary Land & Exploration Company
Denver, Colorado
SAMUEL D. HAAS
Samuel D. Haas has practiced Oil & Gas law with Thompson & Knight since graduating from University of Texas Law School in 1973. Prior to moving his residence to Santa Fe, New Mexico in 1998, and assuming Of Counsel status with the firm, he was a partner/shareholder in Thompson & Knight and head of the firm's Oil & Gas practice for a number of years. He continues to maintain an office in Thompson & Knight's Dallas office. He is a past President of Rocky Mountain Mineral Law Foundation (2001-02), and has also served the Foundation as Vice President (2000-01), Treasurer (1997-99), member of the Executive Committee (1993-95, 1997-99, 2000-04), Trustee (1986-99 & 2000-present) and as a member of various committees. He is a former member of the Council (Board of Directors) of the Oil, Gas and Mineral Law Section of the State Bar of Texas and the Board of Directors of the Oil & Gas Section of the Dallas Bar Association. Active in continuing education matters, he has been a member of the Foundation's Special Institutes Planning Committee since 1984, chaired the Foundation's Annual Institute in 1991 and was Oil & Gas Program Chair for the 1988 Annual Institute, and has helped plan programs for other entities including the State Bar of Texas, Dallas Energy Forum (Program Chair 1993) and Dallas Bar Association. He has made presentations at various programs, including programs sponsored by the Foundation, the State Bar of Texas, Dallas Bar Association, Center for American and International Law (at the time known as Southwestern Legal Foundation), Eastern Mineral Law Foundation, the University of Tulsa and Gas Daily. He is also a partner in Tiger Bend, Ltd., a family owned limited partnership which holds farmlands, timberlands and minerals (largely located in central Louisiana).
JOLISA MELTON DOBBS
Jolissa Melton Dobbs joined the Oil and Gas Section of Thompson & Knight L.L.P. as an Associate in 2000. She received her Bachelor and Master of Accountancy degrees from the University of Oklahoma in 1995 with the honor of summa cum laude. From 1995-97, Jolisa worked as an Internal Auditor for Exxon Company, U.S.A. She received her Juris Doctor degree from the University of Oklahoma in 2000 where she was a member of Order of the Coif. While in law school, Jolisa was the recipient of the Rocky Mountain Mineral Law Foundation Joe Rudd Scholarship and the Eastern Mineral Law Foundation Scholarship, and worked as a research assistant for Professor Owen Anderson, the Eugene Kuntz Professor in Oil, Gas & Natural Resources. Jolisa is an inactive Oklahoma Certified Public Accountant and is admitted to the State Bar of Texas.
MILAM RANDOLPH PHARO
Milam Randolph Pharo is Vice President -- Land & Legal at St. Mary Land & Exploration Co. in Denver, Colorado. He earned his B.A. at the University of Texas at Austin and his J.D. at Southern Methodist University. He was admitted to practice in 1977.
The Purchase and Sale Agreement The Seller's View1
Introduction
What is a seller's viewpoint in an oil and gas properties purchase and sale agreement? The seller wants to sell only those properties that it feels has been given adequate value in buyer's offered purchase price, to get his money as soon as possible (with few, and preferably no, reductions from the purchase price offered), and to be left with few, and preferably no, continuing obligations and/or liabilities. "Here are the keys, gimme my money, don't call me"--that's a little simplistic, but not by much.
As a part of this presentation, an example purchase and sale contract (purchase and sale contracts will be referred to herein as PSAs) has been prepared and is included as a part of these materials. Although prepared for this presentation to highlight issues of concern to seller, it is also like a "preferred draft" PSA that a seller might furnish to a buyer, or place in a data room. This example PSA is NOT intended to be a form. Nor will it highlight every issue of concern to a seller. It is just an example to focus this presentation and highlight issues covered by this presentation. Every deal is different. Every seller (and buyer) has different motivations, concerns, and personality -- which will often vary from deal to deal even with the same seller.
In addition to the example PSA, examples of possible alternative language have been provided (referred to herein as Riders). As with the PSA, these Riders are provided only to focus the presentation, and to highlight some issues. They are also NOT intended to be a form, nor are they exhaustive-there are many issues, many ways to resolve issues, and many ways to write up those resolutions. Hopefully, though, between the example PSA, the Riders, and the text below, this presentation will provoke some thought, offer some ideas, and otherwise be helpful.
Having offered all that as a preface, let's get started through the PSA.
The Parties
That seems pretty simple, and usually it is. There is a seller and a buyer. They are oil industry entities of some substance who are buying and selling a group of properties. In many cases, that is the case-and in the example PSA this is assumed to be the case. But there are other situations, and here are a few thoughts on other situations.
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Multiple Sellers. Sometimes there is a group of sellers. Typically (not always) one is the ringleader, and typically (not always) it is the operator. In some cases, the non-operators will know little about the properties and their operation.
Multiple sellers probably will not want to be responsible for each other. This manifests itself primarily in the areas of representations and indemnities. One party will not want to represent things about another party or be responsible (through representations, indemnities or otherwise) for another party's interest in properties. Non-operators may not want to make operational representations (or indemnities) at all, feeling that they have little knowledge of, or control over, such matters. The Rider titled "Several Liability Rider" is a simplistic approach to the "don't want to be responsible for any other seller or his properties" issue (in the example PSA, this would be added to the miscellaneous provisions). Obviously, this can be handled in a more elaborate manner, but this may capture the essence of the concept.
Although really the buyer's point, the buyer may not want to deal with each and every seller on a day to day basis in administering the contract-most notably in due diligence/curative/price adjustment and accounting issues. The Rider titled "Seller's Representative Rider" provides some language to deal with this issue (in the example PSA, this would be added to the miscellaneous provisions). Sometimes all sellers will happily let one person take care of all these administrative matters, and sometimes they will want input. This must be considered and dealt with, but it is a separate issue. Buyer probably doesn't really care if all sellers want input or not, it just doesn't want to deal with a room full of people on every title defect, accounting adjustment, or other issue. There is also potential for conflicts among the sellers, particularly where they do not each own a uniform interest in all properties. For example, agreeing on allocated values for title defect purposes can be an adventure with non-uniform ownership. A seller will assert that the properties in which it has a bigger relative interest are worth more than the allocation indicates and, vice versa, those in which it has a smaller relative interest, or no interest, are worth less. If a seller's representative is used, a person acting as agent would presumably have some duties to the parties for whom it is acting as agent, such issue is beyond the scope of this presentation.
[Buyer's Note: Care will also be needed regarding warranties and possibly covenants when there are multiple Sellers. In addition, the duties of a Sellers' representative should be specified.]
Different Types of Sellers. If seller is not an "industry" player, or if the properties are all non-operated, seller will probably be even more reluctant than usual to provide representations, indemnities, and other entangling agreements with potential lingering liability.
Less Substantial Sellers or Buyers. Obvious cases are undercapitalized buyers or sellers, financially distressed sellers, sellers going out of business, and single purpose entity buyers (formed just to purchase the package of properties, either as freestanding entities or as a subsidiary of another entity). Where these situations exist, consideration must be given to the fact that agreements of the "less substantial" party may not, as a practical matter, be worth much. Perhaps the most important point is to know the other party and be aware when situations like this present themselves. As a seller, getting the money may be enough if there are few, if any,
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ongoing obligations from the buyer that seller actually-relies upon. However, if there are ongoing obligations that need substance, a third party guarantee, parent guarantee, or escrowing some additional funds may be something seller should consider.
What's Being Sold
Before the portion of the PSA describing the assets being sold can be drafted, the parties need to agree upon what exactly is being sold. Is seller disposing of everything in an area? If so, very broad descriptions, possibly including a "catch all" clause, could be appropriate. If not, more restrictive descriptions are appropriate. Is seller disposing...
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