CHAPTER 7 TITLE DUE DILIGENCE FOR ACQUISITION, DISPOSITION, AND TRADE TRANSACTIONS - PLANNING, MANAGEMENT, AND THE ROLE OF TECHNOLOGY

• Jurisdiction: United States

Oil & Gas Mineral Title Examination (Sep 2019)
CHAPTER 7
TITLE DUE DILIGENCE FOR ACQUISITION, DISPOSITION, AND TRADE TRANSACTIONS - PLANNING, MANAGEMENT, AND THE ROLE OF TECHNOLOGY
Paul J. Atencio
Elena L. Rorabaugh
Babst Calland
Pittsburgh, PA

[Page 7-1]

PAUL ATENCIO is a shareholder in Babst Calland's Energy and Natural Resources Group and serves as a vice-chair of the firm's Mineral Title Department. Paul is an experienced and creative problem solver specializing in oil and gas law and assisting clients in the development of oil and gas assets. He counsels oil and gas companies on a wide range of energy matters, including title, due diligence, title defect curative work, mineral and lease acquisitions, joint ventures, oil and gas lease and leasing issues, and voluntary and forced pooling. Paul also assists clients in their defense of disputes regarding royalty and bonus payments, ownership of oil and gas, and surface use and damage claims. He is admitted to practice in Pennsylvania, West Virginia, Ohio, Texas and New Mexico.

ELENA RORABAUGH is a shareholder in the Energy and Natural Resources Group at Babst Calland in Pittsburg, PA, where she assists companies navigate the legal obstacles to oil and gas exploration and production. Elena's practice focuses on energy, oil, gas and mineral-related transaction matters, including title examination and title curative work. Elena also counsels clients with respect to acquisitions and divestitures of oil and gas assets and has experience in all aspects of title due diligence. She is a regular contributor to the Pennsylvania Independent Oil and Gas Association's monthly publication and has experience with title law in Pennsylvania, West Virginia, Ohio, Oklahoma and Texas.

In the energy industry, a large-scale asset trade, acquisition, or divestiture is a "make or break" moment for all parties to the transaction. A successful divestiture may create opportunities for reinvestment and growth for the seller, but the purchase of troubled assets will place liabilities and curative burdens on a buyer that could last for years. The high stakes involved place special emphasis on title due diligence. Title counsel must be in a position to evaluate a high volume of information in a short period of time to identify defects and assess risks within a margin that is acceptable to the client and meets the agreed-upon criteria in the Purchase and Sale Agreement (the "PSA"). This paper will focus on the strategies and tools for managing information and time through planning, coordinating and managing a large-scale due diligence project, with a special emphasis on the role that technology can play in that process.

Prior to signing a transaction agreement, the seller must accumulate information to determine which assets will be sold. This information is often generated by land management software and converted into a spreadsheet. The spreadsheet listing the assets to be sold serves as the foundation for the schedule of assets that will ultimately be part of the PSA or other transaction agreement. Generating the schedule of assets requires the landman, or more often a team of landmen, to ensure there is no duplication of assets and to verify the accuracy of the description of the assets. While the asset schedule may appear as a free-standing document, the pertinent information typically remains in the form of a spreadsheet. Accordingly, it is most common that the buyer's due diligence team will utilize the spreadsheet provided by seller for purposes of

[Page 7-2]

adding information gathered during the due diligence period in the form of numerous new columns of data under consideration. As many will attest, spreadsheets pose myriad problems for due diligence. In this paper, we will posit that the use of spreadsheets for entering and tracking information during due diligence should be secondary to the use of databases as the preferred method for large-scale due diligence projects.

1. Planning and Preparation for Due Diligence

Planning and preparing for the due diligence period is critical to the success of the transaction. The process must begin with the transaction agreement (whether it be a Purchase and Sale Agreement, a Trade Agreement or other agreement). The terms of the PSA control all aspects of the transaction and will be relied upon for every step of the due diligence process. Most importantly to our discussion herein, the PSA must set forth the timeline for the due diligence and curative periods, which must be reasonable in light of the assets to be examined, and the process for asserting defects and a mechanism for cure or other remedies.¹ The PSA also defines the defects and any permitted encumbrances and what title specific circumstances qualify for each. The definitions agreed upon between the parties will determine the scope of the due diligence examination. For example, the parties can agree to have a narrow definition of a "defect" and a broad definition of "permitted encumbrances," which would make the due diligence period more streamlined (e.g. the PSA may set thresholds that must be met before a technical defect reaches the definition of a "Defect" in the PSA or provide a large list of "Permitted Encumbrances"),

Advanced involvement and preparation by both the seller's and buyer's due diligence teams is...