modern transactions and historical clauses · ownership in the contract area in the oil and gas...
TRANSCRIPT
Modern Transactions and
Historical Clauses
Daniel B. McLane, Esq.
Presented by:
Introduction
There are two common “legacy” provisions in joint
operating agreements that have the potential to create
havoc in commercial transactions:
1. The Preferential Rights Provision; and
2. The Maintenance of Uniform Interest Provision
(“MUI”)
The Preferential Rights Provision
▪ A “dormant” right that ripens only when a subject
interest is offered for sale
▪ The holder does not have a right to force a sale –
the “trigger” is solely in the hands of a seller
▪ The power to preempt a sale to a new third party
▪ One of the more controversial provisions
AAPL (1989) Model Form JOA
Preferential Right To Purchase (1/3)
Should any party desire to sell all or any part of its
interests under this agreement, or its rights or interests
in the Contract Area, it shall promptly give written
notice to the other parties, with full information
concerning its proposed disposition, which shall
include the name and address of the prospective
transferee (who must be ready, willing and able to
purchase), the purchase price, a legal description
sufficient to identify the property, and all other terms
of the offer.
AAPL (1989) Model Form JOA
Preferential Right To Purchase (2/3)
The other parties shall then have an optional prior
right, for a period of 10 days after the notice is
delivered, to purchase for the stated consideration on
the same terms and conditions the interest which
the other party proposes to sell; and, if this optional
right is exercised, the purchasing parties shall share
the purchased interest in the proportions that the
interest of each bears to the total interest of all
purchasing parties.
AAPL (1989) Model Form JOA
Preferential Right To Purchase (3/3)
However, there shall be no preferential right to
purchase in those cases where a party wishes to
…dispose of its interests by merger, reorganization,
consolidation, or by sale of all or substantially all of
its Oil and Gas assets to any party, or by transfer of
its interests to a subsidiary or parent company or to a
subsidiary of a parent company, or to any company in
which such party owns a majority of the stock.
The Maintenance Of
Uniform Interest Provision (1/3)
▪ Requires the seller to dispose of:
o All of the seller’s interests; or
o An equal undivided interest in the assets
▪ Goal is to preserve the original proportionate
interests
The Maintenance Of
Uniform Interest Provision (2/3)
▪ Unlike the Preferential Right, the MUI does not
give the holder the ability to restrict who may buy
an interest but only how they may try to do so
▪ The MUI reduces the potential population of third
party buyers
The Maintenance Of
Uniform Interest Provision (3/3)
▪ Seeks to avoid creating a JOA nightmare that
could result from multiple slicing and dicing of
interests
▪ Widely accepted that these are the most ignored
provisions yet are frequently breached but not
enforced
AAPL (1989) Model Form JOA
Maintenance Of Uniform Interest (1/2)
For the purpose of maintaining uniformity of
ownership in the Contract Area in the Oil and Gas
Leases, Oil and Gas Interests, wells equipment and
production covered by this agreement, no party shall
sell, encumber, transfer or make other disposition
of its interest in the Oil and Gas Leases and Oil and
Gas Interests embraced within the Contract Area or in
wells, equipment and production unless such
disposition covers either:
AAPL (1989) Model Form JOA
Maintenance Of Uniform Interest (2/2)
1. the entire interest of the party in all Oil and Gas
Leases, Oil and Gas Interests, wells, equipment and
production; or
2. an equal undivided percent of the party’s present
interest in all Oil and Gas Leases, Oil and Gas
Interests, wells, equipment and production in the
Contract Area.
What Are The Benefits? (1/2)
1. Gives an original party/developer the right to
restrict the entry of later undesirable third-parties
What Are The Benefits? (2/2)
2. Measure of control over who has a say in the
financial and operational decision process
3. Gives an original owner a priority opportunity to
increase its holdings
4. Protects the investment of an original party by
insuring that all parties to the agreement will be
similarly situated and motivated
What Are The Drawbacks?
1. Reduced marketability of an interest
a. Deters a potential buyer
b. Impairs the fair market value
2. Survive long into the future
3. Substantial litigation risk to future transactions
Transactions To Consider
▪ Stock trusts – royalty interests
▪ The Subsidiary “Texas Two – Step”
▪ Acreage swaps
▪ Multi-property package sales
▪ Stock sale of holding company owning a subject
asset
▪ Assignments
Common Litigation Claims
▪ Breach of the JOA
▪ Tortious interference
▪ Rights holder against both the Buyers and the
Sellers
o Buyers against the Seller for Indemnification
Demands For Relief
▪ Damages
o Lost profits
o Diminution/destruction in value
▪ Specific performance
▪ Declaratory relief
▪ Injunctive relief
▪ Reconveyance
The Lack Of Clear Guidance
From The Courts“Nothing in the world causes so much
misery as uncertainty.”
Martin Luther
▪ In Pennsylvania – there is little authority from the
Courts on these provisions
▪ Disputes are often subject to private arbitration
which hinders uniform development
▪ Cases are handled on an inconsistent basis
▪ While the law varies by state, courts tend to strictly
construe these provisions
