CHAPTER 7 STRUCTURING OIL AND GAS PROPERTY ACQUISITIONS: STOCK TRANSACTIONS VERSUS ASSET SALES
| Jurisdiction | United States |
(May 2006)
STRUCTURING OIL AND GAS PROPERTY ACQUISITIONS: STOCK TRANSACTIONS VERSUS ASSET SALES
Paul Hilton
Hogan & Hartson L.L.P.
Denver, Colorado
HOWARD L. BOIGON
Howard Boigon is a partner in the Denver office of Hogan & Hartson LLP, an international law firm based in Washington, D.C. He is co-leader of the firm's Western Resources Practice Group, which advises energy companies and other resources developers on project development throughout the Rocky Mountain West. Howard's practice focuses on transactional, legislative, and regulatory matters in the various fields of natural resources law and on business counseling for natural resource companies. Prior to joining Hogan & Hartson, Howard served as vice president, general counsel, and corporate secretary at Westport Resources Corporation, a Denver-based NYSE exploration and production company. Before his position at Westport, he served as director, vice president, general counsel and secretary at Basin Exploration, Inc., another public E&P company. Before that, he was a partner in the Denver firm of Davis, Graham & Stubbs, where he specialized in oil and gas law. Howard has served as president, and is a current member of the board of directors, of the Colorado Oil and Gas Association. He has served on the board of trustees of the Rocky Mountain Mineral Law Foundation and has chaired and spoken at several past programs of the Foundation. He is a past chair of the Mineral Law Section of the Colorado Bar Association and served as Natural Resources Practitioner in Residence at the University of Denver School of Law. He was a principal author of the 1989 revision to the AAPL form 610 operating agreement and has lectured and written widely on joint operations in the extractive industries and other aspects of oil and gas law and practice. Prior to entering private practice, Howard served as law clerk to the Honorable Wade H. McCree, Jr. of the United States Court of Appeals for the Sixth Circuit. He graduated college and law school from the University of Michigan, which used to have a good football team.
PAUL HILTON
Paul Hilton is a Partner in the Denver office of Hogan & Hartson. He advises public and private companies in merger and acquisition, securities and corporate governance matters. He has represented private and public companies in the mining and oil and industry for over 20 years. Paul is a frequent lecturer on current securities and M&A topics, and is the co-author of Director's Deskbook: Guide to Sarbanes-Oxley (Warren, Gorham Lamont, 2005); Paul is ranked No. 1 in Colorado for Corporate/M&A by Chambers USA: America's Leading Lawyers for Business. Education: J.D., Cornell University Law School, 1977; M.A., University of Colorado, 1977; B.A., with honors, University of Colorado, 1972. The Best Lawyers in America, 2004-05. Admitted in Colorado and New York.
TABLE OF CONTENTS
I. DEAL STRUCTURES
A. Asset Acquisitions
B. Stock Acquisitions
C. Mergers
D. Tender Offers and Exchange Offers
II. STOCK VS. ASSET ACQUISITION: THIRD-PARTY RIGHTS AND LIABILITY CONSIDERATIONS
A. Avoidance of Third-Party Approvals and Participation Rights
1. The Right to Operate
2. Preferential Purchase Rights
3. Approval of Lease Assignments: Fee, State, Federal and Indian
4. Permit Transfers
5. Intellectual Property and Contract Rights
6. Step Transactions: The "Texas Two Step" and Other Creative Avoidance Moves
B. Assumption and Avoidance of Liabilities
1. Environmental Liabilities
2. Royalty Liabilities
III. STOCK VS. ASSET ACQUISITION: TAX CONSIDERATIONS
A. Taxable Transactions
B. Tax-Free Transactions
1. Type A Reorganizations
2. Type B Reorganization
3. Type C Reorganization
4. Nonstatutory Limitations on Reorganizations
IV. COMPARISON OF STOCK ACQUISITIONS AND ASSET ACQUISITIONS: DRAFTING AND OTHER DEAL CONSIDERATIONS
A. Representations and Warranties, Covenants, Indemnities and Remedies
1. Representations and Warranties
2. Covenants Pending Closing
3. Indemnification and Remedies
4. Balance Sheet Issues and Price Adjustments
B. Corporate Governance
1. Approvals
2. Post-Closing
C. No-Shop, Fiduciary Out and Termination Rights
D. Securities Law Compliance
1. Overview: When is Disclosure Required
2. The Anti-Fraud Standard
3. Registration or Private Placement
4. Scenarios
E. Dissenters' Rights
1. Drafting Point
V. CONCLUSION
Most of corporate America buys and sells businesses, small and large, by means of stock purchases and merger transactions, yet asset sales remain the customary transaction in the oil and gas industry. With record high commodity prices and the entry of new investors like the private equity buyers into the oil and gas arena, is there an opportunity to reconsider whether stock transactions may provide benefits to both sellers and buyers?
Most acquisitions of producing oil and gas properties are structured as asset acquisitions, generally because the target assets do not comprise the entirety of an operating entity or because the buyer is unwilling to take on the seller's corporate liabilities or because asset transactions can be more favorable for buyers from a tax perspective. In some cases, however, it may be more beneficial to one or both of the parties to structure property acquisitions as stock purchases rather than asset acquisitions. This paper will consider issues relevant to the decision of both seller and buyer to choose one form of transaction vs. the other and will discuss the drafting differences between a stock acquisition agreement and an asset purchase and sale agreement.
The Foundation has addressed this topic before. In the November 1995 Special Institute on Oil and Gas Acquisitions, there were several papers focusing at least in part on stock transactions vs. asset acquisitions. In what amounted to a breathtaking technological innovation for the Foundation, for his paper George Morgenthaler attached a floppy disk containing three forms of agreement illustrating the different forms of acquisition documents: an asset transaction, a stock transaction, and a merger.1 His discussion of timing issues -- the interplay between due diligence, representations, warranties and covenants, signing date, effective date, and closing date - did not draw significant distinctions between the three different types of transactions.
At that same program, Jim Piccone summarized non-tax considerations bearing on the decision to structure an acquisition as an asset deal
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or a stock transaction.2 We will consider these considerations, and others, below. He concluded that, while many of these factors could be important in individual cases, there were often ways to negotiate around them in order to minimize the differences in substantive result regardless of the form of transaction. He noted that generally tax considerations drove the decision on form.3
One year earlier, John Siegesmund summarized the major ways of structuring acquisitions and described the principal tax and business considerations inherent in each form.4 His paper, still a very useful research tool, outlines the characteristics of asset and stock acquisitions structured as taxable and tax-free transactions.
One other excellent research source is a 1989 paper written by James Irish for the Southwestern Legal Foundation.5 This paper is an exhaustive treatment of the tax and non-tax considerations in structuring large-scale acquisitions of oil and gas properties as stock or asset transactions.
Our paper will draw on the works of those authors and others to summarize and update key factors driving the decision to structure an acquisition of oil and gas properties as a stock or asset sale and will summarize the differences in drafting, legal and transactional considerations resulting from the choice of vehicle.6 Although we commonly throughout this paper use the term "stock transaction," the comparison may more properly be characterized as one between asset transactions and "corporate" transactions involving a variety of different organizational vehicles.
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The discussion in this paper is not intended to be exhaustive. There are many factors that will govern the planning decisions in structuring acquisitions, relating to the attributes and objectives of the parties and the nature of the assets. A partial list includes:7
1. The extent to which approvals are required from boards of directors, managers, stockholders, members or partners, and issues surrounding the obtaining of any necessary approvals.
2. The federal income tax consequences to seller, buyer, and the stockholders or members of each.
3. The extent to which liability avoidance is a concern of the parties.
4. The extent of third-party consents, preferential rights, debt acceleration, or other restrictions bearing on transferability of key assets.
5. The extent of logistical concerns presented by conveyancing requirements.
6. The extent to which there is disagreement among owners of the seller regarding the desirability of the transaction or its terms.
7. The extent to which federal or state securities laws will require disclosure or registration.
8. The extent to which timing is important.
9. The extent to which dissenting stockholders or members will have appraisal rights or other minority protections or may continue to be involved in the ongoing enterprise after conclusion of the transaction.
The purpose of this paper is to give an overview of the issues that are of particular significance in structuring typical transactions involving producing oil and gas properties, and to examine how the agreements governing such transactions will vary depending on the form of transaction selected.
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I. Deal Structures
As indicated above, the decision to structure an acquisition as a stock or assets acquisition depends on...
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