CHAPTER 2 STRUCTURING THE TRANSACTION: EQUITY VS. ASSET CONSIDERATIONS

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HOWARD L. BOIGON is the founder and sole member of Boigon Law Ltd, a Denver boutique law firm focused on the practice of natural resources law, with a particular focus on the upstream oil and gas industry, both in the United States and internationally. Howard founded Boigon Law in 2014 after over 40 years of experience in large law firms and as general counsel of publicly traded exploration and production companies. His objective in starting his own law firm was to bring his big firm capability to the affordability and personal attention that a small firm can offer. Clients have included the full range of stakeholders engaged in or affected by the industry. His practice focuses on transactional, regulatory, and legislative matters in energy and natural resources law and policy and on business counseling for natural resources companies. Howard's extensive experience includes mergers, acquisitions, and dispositions of natural resource companies and properties; negotiating and drafting of purchase and sale agreements; joint venture, exploration, and operating agreements, master service agreements, drilling and platform agreements, production-sharing agreements, production transportation and marketing agreements, and other industry agreements covering projects onshore and offshore, domestic and international; lobbying and policy advocacy at all levels of government; regulatory matters; general business counseling; project finance; and administrative proceedings and litigation. Prior to founding his law firm, Mr. Boigon was a partner in the Denver office of Hogan Lovells, a global law firm. Before joining Hogan Lovells, Mr. Boigon served as Vice President, General Counsel, and Corporate Secretary at Westport Resources Corporation, an NYSE exploration and production company, and prior to that he was Director, Vice President, General Counsel, and Secretary at Basin Exploration, Inc., another public exploration and production company. He began his legal career with the Denver firm Davis, Graham & Stubbs, where his practice focused on natural resources law, including oil and gas, mining, and public lands. Prior to entering private practice, Mr. Boigon served as a law clerk to the Honorable Wade H. McCree, Jr. of the U.S. Court of Appeals for the Sixth Circuit. He is a graduate of the University of Michigan for both college and law school. In law school he served on the editorial board of the Michigan Law Review and graduated magna cum laude.

PAUL HILTON is a partner at Hogan Lovells US LLP, in Denver, Colorado. As a leader of the firm's U.S. Public Company practice, Paul counsels companies in a wide range of industries, with a particular focus on oil, gas, and mining. Hogan Lovells is a major international law firm with approximately 2,600 lawyers in 47 offices around the world. The Denver office has approximately 90 lawyers. Paul advises public and private companies in a full range of corporate matters, including mergers and acquisitions, companies seeking to go public, private equity firms, investment banking firms, and acquirers and targets in acquisition transactions. He regularly handles complex U.S. and cross-border transactions, debt and equity offerings, including both U.S and cross-border transactions, disclosure issues, counseling for boards of directors and committees, and critical corporate governance matters, including dealing with activist investors. Paul has received a Band 1 ranking from Chambers USA for Corporate/M&A every year since 2004 and has been listed in The Best Lawyers of America for many years as well. Among the accolades received from the legal ranking publication, Chambers & Partners: "Paul Hilton has decades of experience, and has very deep experience in corporate and securities matters, as well as commercial transactions of all kinds. In addition to having the technical expertise in these areas, he is very practical in rendering advice and coming up with solutions. He has excellent communication skills, both in respect of transaction negotiations, and communication with our board and management." Paul is a graduate of the University of Colorado (B.A., M.A.,) and received his J.D. from Cornell Law School, where he was editor of the Cornell Law Review. He is a member of the Colorado and New York Bar.

Structuring Oil and Gas Property Acquisitions: Stock Transactions Versus Asset Sales^*

(c)Howard L. Boigon

Boigon Law Ltd.

Howard@Boigonlaw.com

Paul Hilton

Hogan Lovells US LLP

paul.hilton@hoganlovells.com

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Table of Contents

INTRODUCTION

A. Private Equity

B. Factors Driving the Deal Structure

I. DEAL STRUCTURES

A. Asset Acquisitions

B. Stock or Entity 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 reorganization

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. Comparison of Key Features of Purchase Agreements

1. Leverage Issues

2. Representations and Warranties

3. Covenants Pending Closing

4. Indemnification and Remedies

5. Material Adverse Conditions

6. Balance Sheet Issues and Price Adjustments

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B. Corporate Governance

1. Approvals

2. Post-Closing

C. Management Issues and Private Equity Sponsors' Approach to Management

D. No-Shop, Fiduciary Out and Termination Rights

E. Securities Law Compliance

1. Overview: When Is Securities Law Disclosure Required?

2. The Anti-Fraud Standard

3. Registration or Private Placement

4. Scenarios

F. Dissenters' Rights

1. Drafting Point

V. CONCLUSION

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INTRODUCTION

Ten years ago, we gave a paper on this topic to a special institute of the Foundation on sales and financing of oil and gas properties. The papers in that program focused on the nuts and bolts of oil and gas asset acquisitions. At that time, as is often still the case, most acquisitions of producing properties were 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 are more favorable for buyers from a tax perspective. In some cases, however, the parties will structure property acquisitions as stock purchases or corporate transactions rather than asset acquisitions. The purpose of our 2006 paper was to consider issues relevant to the decision of both seller and buyer to choose one form of transaction vs. the other and to discuss the drafting differences between a stock acquisition agreement and an asset purchase and sale agreement.

We have been asked to reprise this topic for purposes of the present program and to consider whether developments over the past 10 years have changed the thinking or practice of structuring transactions as corporate deals vs. asset deals. Over the past 10 years we have been through downturns in the oil and gas industry, the second of which we are still experiencing. Indeed, crude oil prices over the last two years have suffered precipitous declines, with the price per barrel falling from a high of over $110 in 2014, to recent lows of $29 in February of 2016 with the beginning of a recovery under way as we write this. In the five year period trailing 2014, the crude market generally enjoyed prolific access to capital from public markets and strategic buyers. Today, many E&P companies are stressed as bond covenants and bank credit facilities have come under pressure.

One of the more significant developments since 2006 is the emergence of private equity funds focused on oil and gas, and it is worth noting that during this time of financial stress private equity sponsors have over $20 billion allocated to the oil and gas sector. For example, according to Forbes,¹ Blackstone Capital has set aside $9 billion for energy investment, and EnCap and Warburg Pincus tout $5 and $4 billion funds, respectively, for the same purpose. Similarly, according to Reuters, Boston ArcLight Capital Partners LLC in July of 2015 closed a $5.6 billion energy fund and some of this cash is already being deployed.² Private equity funds evidently sense opportunity while oil and gas valuations continue to remain depressed.³ Thus, with it more likely than ever that oil and gas entrepreneurs will encounter private equity backed players in transactions we have built into the paper at various points the approaches and provisions often employed in private equity sponsored acquisitions.

The topic of this paper has been one of recurring interest at the Foundation. 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

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disk containing three forms of...