Pre-Emption Rights- Do They Add Value?
Pre-emption provisions are a common feature of joint operating agreements and are often the cause and subject of disputes between co-venturers. As a matter of English law, pre-emption provisions will be enforced strictly and in accordance with their terms.1
This article provides an overview of the advantages and disadvantages of pre-emption provisions in joint operating agreements and then focuses on how various attempts to avoid them have been treated in the courts. It also explores the problematic issue of valuation of interests which are subject to pre-emption rights.
What are pre-emption rights?
Pre-emption provisions are a standard feature in many forms of agreement where parties share the rights and liabilities in a particular asset or project. They are commonly found in shareholders’ agreements, articles of association and joint venture (JV) agreements.2
In an oil and gas context, it is common for assets to be held and exploited by unincorporated JVs. Where that is the case, the relevant form of JV agreement is the joint operating agreement (JOA). The JOA is entered into following the award of a licence or production sharing agreement (depending on the jurisdiction) and defines the rights and liabilities of the joint venturers. These rights and liabilities are allocated on a percentage basis, such that a party to a JV can divest all or part of its percentage interest to a third party if it wishes to withdraw from the JV or reduce its interest in the same.
However, a joint venturer will not generally be free to transfer its interest without consulting its co-venturers. The transfer provisions of the JOA will often include both consent provisions and pre-emption provisions.
The consent provisions may allow the co-venturers to prevent a transfer by withholding their consent to the same, usually where the proposed buyer does not have the requisite financial capability and/or technical capacity to take on the obligations of the divesting venturer. This mechanism can be used where the co-venturers object to the buyer but are unwilling, or unable, to exercise their pre-emption rights to acquire the interest being divested.
In the context of a JOA, a pre-emption right is a right which provides the non-transferring venturers an option to acquire the percentage interest which the transferring venturer proposes to divest to a third party on the same terms as those offered to the third party.
Looked at another way, a pre-emption right is essentially a negative covenant imposed upon the transferring party which precludes the transferring party from divesting its percentage interest to a third party without having first offered it to its co-venturers on the same terms.
Advantages of pre-emption rights
Pre-emption provisions are intended to provide a control mechanism allowing the existing parties to the JOA the right of first refusal in respect of the divesting venturer’s percentage interest. The rationale underlying this mechanism is that the existing venturers should have the option to benefit from an increased share in the project on the same terms as those offered to a third party. It is also intended to prevent the indiscriminate disaggregation of the beneficial interest in the licence and the associated introduction of multiple interest holders, which could disrupt voting arrangements and the smooth running of the JV.
A standard feature of a pre-emption notice is that its terms and conditions must be accepted unconditionally. This is necessary to ensure that the transferring venturer is no worse off by transferring to its co-venturer, rather than the third party with whom it negotiated those terms. From the co-venturer’s perspective, this will improve their ability to ascertain the true value of a project, which allows them the opportunity to acquire an interest in the project at what might be a better price than if the interest were sold on the open market.
The transfer of an interest also entails the transfer of existing rights and responsibilities in the underlying agreement, such as voting rights or funding obligations. JVs which have been set up to operate large scale projects can carry particularly substantial costs. As such, the remaining JV partners must be comfortable that any incoming party is reliable, co-operative and has the financial and technical means to undertake its share of the JV obligations. Suitability for a particular JV is also a concern and involves an assessment of commercial compatibility, which goes far beyond the cash flow and balance sheets of the proposed buyer. Where a proposed incoming party has the financial and technical capability to join a JV, but is nevertheless considered to be unsuitable by the existing licence holders, a JOA may not permit those licence holders to withhold their consent to the proposed transfer. In that scenario, the pre-emption provisions may fill the lacunae since these do not generally impose any conditions on the circumstances in which, or reasons why, an existing licence holder may acquire the interest being divested.
Pre-emption rights can therefore provide a degree of control over the composition of a JV.
Disadvantages of pre-emption rights
Giving the existing parties to the JOA the right of first refusal does, of course, impact the commerciality of a JV party’s percentage interest, since the incoming party cannot be sure that it will be able to complete its acquisition of the divesting party’s interest. As pre-emption provisions restrict a JV party’s commercial freedom to sell its percentage interest (or a part of it) to a purchaser of its choice, they are often the cause and subject of disputes and have therefore been heavily scrutinised by the courts.
It is common for the divesting venturer to negotiate the commercial terms with a third party before offering the same terms to the existing parties by way of a notice pursuant to any pre-emption provisions (a Notice). This can act as a deterrent for third party buyers, who risk spending significant time and costs negotiating a sale only for an existing party to purchase the interest on the same terms. The time periods and consents involved in the pre-emption process can also make the interest more difficult to sell on in future. It is not uncommon for agreements to dictate lengthy periods in which rights can be exercised, often up to 90 days. These factors can make the asset less attractive to the market.
Even where a third party transfer does take place, the prospect of a future dispute is not extinguished if the contractual limitation periods are over generous or absent. Where no limitation period is provided, the default position under English law is that actions for contract claims cannot be commenced after six years from the date the action accrued.3 If rights are transferred to a third party which are then subsequently found to have contravened pre-emption provisions, this leaves the buyer’s title to the interest and rights under the JOA uncertain. Such interests are consequently less liquid, marketable and, therefore, less valuable.
This appears to have been the view taken by the UK Government in relation to the UK Continental Shelf. As of the 20th Licensing Round, pre-emption provisions in new JOAs were prohibited.4 Additionally, pre-existing pre-emption provisions are now read in line with the “New Pre-emption Arrangements”, which effectively require JV partners who are signatories to the Master Deed5 to exercise their pre-emption rights within 30 days of receiving a Notice.
A further disadvantage of pre-emption provisions is the need to disclose to your co-venturers the terms of the proposed sale in the Notice. Those terms are often commercially sensitive.
3. Principles of contractual interpretation
Pre-emption provisions are not uniform and whilst there may be common principles, the wording of any specific pre-emption provision and the law which governs its interpretation will determine its meaning.
English law takes a purposive and commercial approach to the construction of contracts 6. The starting point for the court is to identify the intention of the contracting parties. This is an objective test; an English court or an arbitral tribunal applying English law will be concerned to identify the intention of the parties by reference to:
“what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”.7
Such a court or tribunal applying English law would, therefore, look at the contract as a whole and would consider not only the words of the relevant clauses, but also the “documentary, factual and commercial context”.8
Courts and tribunals applying English law are reluctant to re-draft clauses and wherever possible will prefer to construe contractual provisions in light of the natural meaning of the words used.9
Further, where the language used by the parties could have more than one potential meaning, a court or tribunal applying English law would be entitled to prefer the construction which is consistent with business common sense.10
Note, however, that this is an entitlement, not an obligation. Even where there is an error in drafting, such a court or tribunal would be extremely wary of re-casting or reading words into contractual provisions. This is especially so where it could not safely be concluded by the reasonable man that a disputed provision was in fact a drafting mistake, and what the exact nature of that mistake was. An alleged or apparent “error” may simply have been the outcome of the commercial negotiations, which will often be more favourable to one party over the other.11
When are pre-emption rights engaged?
A key element of the pre-emption provisions in a JOA is the trigger event. This could be a proposed asset sale (i.e. a proposed sale of the percentage interest itself) or a proposed sale of shares in the entity which owns the percentage interest (i.e. a change of control). The circumstances in which the trigger event occurs will be dependent upon the interpretation of the pre-emption provision and will differ on a case-by-case basis.
A common trigger event is an intention to assign, transfer or sell an interest. It is not difficult to see how or why such a trigger might give rise to a dispute, since determining a party’s intention is necessarily a subjective exercise. However, in certain circumstances, a demonstrable intention can be ascertained.
For example, in Lyle & Scott v Scott’s Trustees, the articles of association of a company contained pre-emption provisions which were activated by a shareholder “who is desirous of transferring his ordinary shares”.12 When a third party made an offer to the shareholders to acquire their shares, some accepted by completing and returning the form of acceptance and a form of proxy. In their acceptance they agreed to sell their shares, authorised the use of the proxy, agreed to deliver up their share certificates and to sign transfer deeds. The accepting shareholders received payment for the shares, but when the non-accepting shareholders sought to exercise their pre-emption rights, the defendants argued that the word “transfer” only applied to a complete transfer of the ownership of the shares by acceptance and registration of the deeds of transfer. The House of Lords, however, concluded that it could be inferred from the series of steps taken by the accepting shareholders that they intended to transfer their shares, and were, therefore, “desirous” of doing the same.
In contrast, in Scotto v Petch a number of shareholders transferred their equitable interests in shares to Northern Racing Ltd by way of a declaration of trust. The shareholders undertook to deal with the shares and exercise their voting rights at Northern Racing’s direction, unless doing so would activate the pre-emption provisions of the Shareholders Agreement. Despite finding the arrangement to be “so obviously artificially constructed so as to circumvent the pre-emption provisions” the Court of Appeal concluded that, by entering into the arrangement, the shareholders had not exhibited an intention to transfer their shares for the purposes of the pre-emption rights provisions and so the trigger event had not occurred.13
Similarly, in the Australian case of Kawasaki v ARC Strang14 the disputed sale was structured so that it was the shares in the parent company of the JV vehicle (ARC Strang) rather than the JV vehicle itself (Prixcar) which were transferred. The relevant pre-emption clause required any party desiring to transfer shares in Prixcar to give a transfer notice to the other existing parties of the Shareholders Agreement. The court held that although a sale of ARC Strang would change the ultimate ownership and effective control of Prixcar, a desire by the shareholders of ARC Strang to sell did not did not equal a desire by ARC Strang itself to transfer its shares in Prixcar. The appellants unsuccessfully argued that a commercially sensible construction of the pre-emption provisions was that no change of control should be permitted without triggering the pre-emption provisions. The court made it clear that if it was the concern of all relevant parties to structure the transaction in such a way as to avoid the pre-emption provisions, it would be inaccurate to infer a desire, wish or intention to transfer the shares in a way that would trigger them.
An intention will not be so inferred where a transfer is conditional on compliance with pre-emption rights. Re Coroin Ltd was a petition for unfair prejudice brought under s.994 of the Companies Act 2006 by Mr McKillen, a shareholder in Coroin Ltd (Coroin).15 Mr Quinlan, a co-shareholder, had fully charged his shares in Coroin to secure some of his debts. Those debts had since been acquired by various Barclays entities (who by that time were also co-shareholders) and sought control of Coroin. Mr Quinlan entered into share sale agreements (the Share Sale) with one of those entities, but the Share Sale was subject to compliance with the Coroin Shareholders Agreement and Articles of Association (the Coroin Agreements). The purchasing Barclays entity deliberately did not formally complete the Share Sale in order to avoid triggering pre-emption rights under the Coroin Agreements. Some months later, Mr Quinlan appointed a nominee of the Barclays entities as a director of Coroin. He also gave a separate Barclays’ nominee power of attorney to perform acts in relation to Coroin on Mr Quinlan’s behalf. Mr McKillen argued that the practical effect of the Share Sale had transferred Mr Quinlan’s interest in his shareholding to the Barclays entities in breach of the Coroin Agreements and thus the failure to offer those shares to him was unfairly prejudicial conduct against him as a minority shareholder in Coroin.
Dismissing the petition, the judge held that although the cumulative steps taken by the Barclays entities meant that they had achieved practical control over Mr Quinlan’s shareholding, there had been no transfer of an interest in the shares. Fundamentally, the Share Sale was conditional on compliance with the pre-emption provisions in Coroin’s Articles of Association, and therefore deliberately fell short of the transfer of an interest in the shares which would trigger the respective pre-emption provisions.16
In summary, a relevant desire or intention to transfer will not be identified where the transfer is conditional upon pre-emption rights having being waived or complied with. Where a transfer is not so conditional, as the court held in the Ringtower case, the desire wish or intention must be manifest in some way, and must be unequivocal.17
Are pre-emption rights absolute?
The simple answer is that pre-emption rights may not be absolute. Again, this will be determined by how the pre-emption provisions have been drafted and the law governing their interpretation.
The wording of the pre-emption provisions may allow various sale structures to be adopted legitimately to avoid their application. Alternatively, they can seek to prevent any and all circumvention. The Association of International Petroleum Negotiators (AIPN) Model Form JOA (2012) contains numerous optional clauses to strengthen pre-emptions rights by catering for different transfer situations.18 Depending on which options are chosen, it is possible to draft a pre-emption clause that expressly prevents circumvention or, conversely, that permits legitimate circumvention in certain situations.
Whilst options for strengthening pre-emption provisions are to be welcomed, it should be remembered that the value of water tight pre-emption provisions depends upon the position and intention of a party at the time of a transfer. A JV party may on the one hand have the benefit of such rights if it is seeking to exclude an unwanted incoming party from the JV. Whereas, on the other hand, it may find its ability to divest its interest severely fettered by the same if its co-venturers take the view that its proposed transferee would be an unsuitable JV partner. As such, pre-emption rights operate as a double-edged sword and JV parties should think carefully as to whether provisions which are too restrictive are appropriate for their particular JV.
Mixed cash/asset or non-cash offers
Some pre-emption provisions are only engaged when the transferring party intends to transfer its interest in exchange for cash consideration. In that scenario, the transferor and transferee may seek to circumvent the pre-emption provisions by negotiating an asset swap with no cash element or, if that is not possible, consideration which is a mix of cash and assets. It may be that the assets offered as consideration for the interest have an open market value which makes it undesirable, or unfeasible, for the existing parties to match it. On the other hand, any assets offered by a third party may have a subjective value to a selling party which make the overall offer difficult to match.
However, many JOAs provide for the attribution of a cash value to mixed cash or non-cash deals to ensure existing parties can still be offered an equivalent deal, and so prevent circumvention of the pre-emption provisions. In such cases, it would be prudent for parties to ensure that the JOA enables a clear attribution of fair market value to the interest being sold through an independent valuation mechanism, and that any disputes concerning the same are referred to an independent expert for a binding determination. This should prevent any complaints that the price offered for the interest has been inflated and make it reasonably clear that there is no credible basis on which to challenge the valuation. The valuation, however, will not be straight forward where the relevant interest has been negotiated as part of a multi-asset, package deal.
The difficulties inherent in establishing a cash value for non-cash consideration was illustrated in Santos v Apache, a recent case from the Supreme Court of Western Australia.19 The case concerned the pre-emption rights triggered under a JOA in which certain Apache group companies and Santos Offshore Pty Ltd (Santos) held participating interests (the Santos JOA). The Apache group negotiated a deal to sell the shares in certain of its subsidiaries, including Apache Energy Ltd (Apache Energy), to Viraciti Energy Pty Ltd (Viraciti). Apache Energy was the sole shareholder of three further Apache subsidiaries which each owned participating interests in the Santos JOA. The fact that the pre-emption regime was activated was not in dispute. The case turned on whether the terms and conditions in the Notice given to Santos were compliant with the terms of the Santos JOA, thereby affecting the validity of the Notice. This decision is likely to have broad application in the industry as the pre-emption terms of the Santos JOA were very similar to those used in the AIPN Model Form JOA.
The relevant provisions of the Santos JOA in dispute were as follows:
“12.3(C) Once the final terms and conditions of a Change in Control have been fully negotiated, the Acquired Party shall disclose the final terms and conditions as are relevant to its Participating Interest, including the date of the Change in Control, and its determination of the Cash Value of that Participating Interest in a notice to the other Parties.
12.3(F) Each other Party shall have a right to acquire the Participating Interest of the Acquired Party for the Cash Value on the equivalent terms and conditions set out in Clause 12.3(C) notice for cash.”20 (Emphasis added.)
The Supreme Court of Western Australia held that there were various terms in the Notice which were either not relevant to the participating interests being transferred, or had been modified so far from those offered to Viraciti that they were no longer equivalent. The purchase price conditions, in particular, were not compliant with the definition of the “Cash Value” consideration to be offered under the Santos JOA. The resultant offer was, therefore, significantly higher than a fair market price (i.e. what a willing buyer would pay a willing seller in an arm’s length transaction). Crucially, the court ruled that the whole Notice was rendered invalid as a result of those non-compliant terms and must be served again.
Parties should therefore be careful to only make the modifications necessary to ring-fence JOA interests from other interests being transferred, and to apportion a fair cash value to those interests. Furthermore, unless the JOA permits non-compliant terms to be severed from an otherwise compliant Notice, strict adherence to its pre-emption provisions is necessary to avoid a Notice being rendered wholly invalid.21 To avoid a dispute arising it would be prudent for the divesting venturer to withdraw a Notice which appears to be procedurally defective, and immediately issue a fresh one which correctly addresses any valid complaints.
Transfers to an affiliate or change of control scenarios
A change in control is, technically, not a decision of the interest holding JV party itself and is, therefore, (and as the term suggests) outside of that party’s control. Such transactions can, depending on the terms of the JOA in question, legitimately enable a third party directly to acquire an interest in a JV which would not be possible by way of a direct acquisition. Where this is not wanted, pre-emption provisions in the JOA will be drafted to be triggered by a “change of control”, which term will be defined as the parties see fit. Separately, it is not uncommon for JV partners to agree that where one of them wishes to transfer its interest to an affiliate, that intra-affiliate transfer will be excluded from the pre-emption regime and will not trigger the pre-emption provisions. The rationale for this is that the ultimate ownership of the interest should not change so, in principle, the financial standing and technical capability, together with the strategic imperatives, of the interest holder would be unaffected.
However, this may not be the case where an intra-affiliate transfer is followed by a change of control. This two-step process is sometimes challenged as an improper circumvention of pre-emption provisions, since it allows an interest holder to disaggregate its interest by selling a portion of the same to another group company, which company it then sells by way of a share sale to a third party.
As the two transactions are separate, and provided the pre-emption provisions do not expressly provide that such a two-step process will constitute a trigger event, the pre-emption regime in the JOA can be circumvented.22 This technique was considered in the Tenneco case, where the Texas Supreme Court held that a share sale does not trigger a pre-emption provision absent express language to that effect and that multiple transactions will not be viewed together to determine whether a preferential right has been triggered.23
Perhaps the most significant judicial acceptance of the legitimacy of the two-step approach in England is McKillen v Misland (Cyprus) Investments Ltd.24 This dispute also concerned Coroin, an investment vehicle which had been set up to acquire four of London’s most luxurious hotels. At the time of the dispute the investors in Coroin were: (1) Mr McKillen, who held a 36.23 per cent shareholding; (2) Misland, which held 24.78 per cent; (3) Mr Quinlan, who held 35.4 per cent; and (4) Mr McLaughlin, who held 3.58 per cent. Misland was wholly owned by A&A Investments Ltd (A&A), a Bermudian company owned by the Green family.
The Green family sought to divest their interest in Coroin to a third party, the Barclay brothers, against McKillen’s wishes. To achieve this, the Green family procured A&A to sell their entire shareholding in Misland to BOL, a Barclays company. There were other transactions during this period which saw other Barclays entities acquire the shareholdings of Mr Quinlan and Mr McLaughlin and the right to appoint directors to the board of Coroin.25
The preliminary issue to be determined was whether the sale of Misland to the Barclays entities triggered the pre-emption provisions in the Coroin Agreements (being the Coroin Shareholders Agreement and Articles of Association).
The relevant pre-emption clause of the Coroin Shareholders Agreement stated:
“... a Shareholder (the Proposing Transferor) desiring to transfer one or more Shares (or any interest therein) (the Transfer Shares) may at any time give notice in writing to the Company (Transfer Notice) of his desire to transfer the Transfer Shares and the sale price thereof and other sale terms, as fixed by him”.
McKillen argued that the word “interest” was intended to include the indirect interest in the Misland shares held (ultimately) by the Green family and that to allow the circumvention of these restrictions by the sale by A&A of its entire shareholding in Misland would “leave a gaping hole in the pre-emption provisions and render them toothless”.26 At first instance, Roberts J disagreed and interpreted “interest” to mean only the direct proprietary interest in the shares in Coroin, being the legal and beneficial title held by Misland. Neither of the Coroin Agreements (which contained almost identical provisions) addressed the sale of Misland, the only corporate shareholder. As both parties were sophisticated commercial entities with legal advice, the High Court determined that the intention of the parties could not have been for the pre-emption regime to encompass this type of situation, otherwise they would have expressly provided so.27
It was argued on appeal that such a literal interpretation flouted commercial sense and contradicted the principle in Rainy Sky.28 In McKillen’s view it produced a “dramatic disparity” between the obligations of the individual investors, who were tied to the pre-emption regime for at least four years, and the Green family who could transfer their interest to an outsider without restriction.29
The Court of Appeal disagreed. It was, it said, a “basic principle” that the beneficial interest in a company’s assets belong to that company alone, and not its shareholder.30 Therefore, the “natural sense” of the relevant clauses were focussed on the transfer of a proprietary interest in the Coroin shares. Only Misland had that proprietary interest, and there was therefore no rational basis on which a sale of Misland by A&A could be a sale of Misland’s shares in Coroin for the purposes of the pre-emption regime.31
Like Kawasaki and Tenneco, the English court’s position in McKillen highlights the importance of drafting any restrictions in pre-emption provisions clearly. Commercial parties should consider whether provisions that restrict only the parties themselves will suffice. If a corporate shareholder undergoes a change of control, a third party may be able to influence the exercise of a JV party’s rights despite having no direct interest in the company. Despite being concerned with a luxury London hotel, the principles to be derived from the McKillen decision can readily be applied to the interpretation of pre-emption provisions in JOAs.
An example of an even more elaborate transfer, which could be described as a “three-step approach” was considered by the Supreme Court of Victoria in Esso Australia.32 Esso and SPP were parties to a JOA and, after some time, SPP wished to assign its interest in the underlying licence to a third party without engaging the pre-emption regime in the JOA. This was only permitted under the JOA where:
(a) the assignee was a Related Corporation (as defined in s.5(1) of the Australian Companies Act 1981);
(b) the Related Corporation assumed all of the assignor’s obligations; and
(c) the assignor guaranteed the assignee’s obligations, with such guarantee to continue if the assignee ever ceased to be a Related Corporation.
SPP then created a Special Purpose Vehicle (SPV) which satisfied the definition of Related Corporation (Step 1), transferred its interest to that SPV (Step 2) and subsequently sold the SPV to a third party (Step 3).33 It was universally recognised that that the SPV was created for the sole purpose of avoiding Esso’s pre-emption rights, but Hollingworth J found that there was no ambiguity in the provisions of the JOA to suggest that such a transaction was prohibited. These provisions were the result of lengthy negotiations between two substantial companies and Esso merely contested a result which it had found commercially unacceptable.34
The results in these cases beg the question: have pre-emption rights lost their value? Whilst it is undoubtedly true that the parties seeking to rely on the pre-emption provisions in these cases would contend they were not adequately protected by the relevant pre-emption regime, the cases do not mean that parties cannot ensure that pre-emption provisions are triggered by such two or three-step transactions. This simply requires clear drafting to this effect in the JOA.
The courts in both England and Australia have shown that they will apply pre-emption provisions strictly, but they will not strengthen inherently weak drafting to encompass situations which could have been contemplated and provided for by the parties and their lawyers (although it has been noted that there may be a greater willingness by the Australian courts “to grant relief against attempts to circumvent pre-emptive rights provisions where those attempts contravene the spirit, if not the letter of the provisions”).35
Conclusion
Regardless of the recent collapse in oil prices, oil and gas assets continue to be bought and sold. For so long as this is the case, pre-emption provisions will remain an important factor in the dynamics of a negotiated transfer. The manner in which a pre-emption regime will operate is in the hands of the original parties to the relevant JOA, since it is the language that they agree between them that will determine the scope and application of the regime. These parties should therefore give proper consideration to the drafting of their pre-emption provisions and should be cautious to ensure that whatever is agreed allows them to deal with their interests efficiently and reduce the risk of lengthy litigation or arbitration proceedings when one of them wishes to dispose of all or part of their interest.
Parties should appreciate that pre-emption provisions, whilst a standard feature of most JOAs, have both advantages and disadvantages. There is little to be gained by drafting pre-emption provisions which are too restrictive or burdensome as this may reduce the marketability of the underlying interest. Whilst it is right for the parties to be vigilant in retaining control over who may enter and exit ventures, an overly protective pre-emption regime could prove just as troublesome as a porous one.
During the negotiation of a JOA, the parties should expressly agree which types of transactions will engage pre-emption rights and how. For regimes which seek to encompass all types of transaction structure, the Santos decision should provide a reminder that, in a bundled transfer, distinguishing the participating interest(s) from other interests being transferred, and arriving at a fair market value for that specific interest is not straight forward. The JOA should be clear as to how any necessary modifications to third party offers should be made, specifying exactly which terms should be replicated and how. Additionally, valuation issues should be anticipated and addressed through independent valuation mechanisms with any related disputes swiftly being referred to an expert for binding determination.
An open and honest approach should also be taken towards the discussion of change of control scenarios and transfers to affiliates. If it is the intention of the parties for two-step and three-step transactions (such as those seen in Tenneco and Esso) to engage the pre-emption regime, then that should be agreed and expressly reflected in the drafting.
The key message when negotiating pre-emption provisions is that great care should be taken to ensure that the drafting is clear and unequivocal in all respects and that it properly reflects the parties’ intentions. Disputes and procedural irregularities can be avoided if parties give such provisions their full consideration and turn their minds to the possible future circumstances which may ultimately engage the pre-emption regime.
This article was first published by Thomson Reuters (Professional) UK Limited in the International Energy Law Review ([2016] I.E.L.R. 126) and is reproduced with kind permission of the publishers.
1. McKillen v Misland (Cyprus) Investments Ltd [2012] EWCA Civ 179; [2012] B.C.C. 575 and Re Coroin Ltd [2013] EWCA Civ 781; [2014] B.C.C. 14.
2. Pre-emption rights can also be imposed by statute. For example, the English Companies Act 2006 applies pre-emption rights to the issue of equity securities by a public or private company. Such regimes fall outside of the scope of this article.
3. The “action” being the alleged breach of contract, see s.5 of the Limitation Act 1980. The governing law of the agreement which grants pre-emption rights should be always be checked and local lawyers consulted in order to identify the applicable limitation period.
4. A licensing round is when a national government will award licences for the right to explore for petroleum in particular onshore or offshore “blocks” during a defined
period. Incorporated or unincorporated JVs may be set up for the purpose of bidding for these licences.
5. The Master Deed is a standard form document for the transfer of oil and gas interests held in the UK Continental Shelf. It was introduced to standardise pre-emption, transfer and signatory provisions to reduce the complexities and time taken to transfer an asset. The intention was that the new regime would stimulate an ailing UK industry,which was seen as complicated and uncertain for third party buyers. Only time will tell whether restricting rights in this manner will strike the right balance between economic
growth and ensuring the legal and commercial interests of existing JV parties are sufficiently protected. For further information see http://www.logic-oil.com/master-deed /general-guidance/new-pre-emption-arrangements [Accessed 17 May 2016].
6. Investors Compensation Scheme v West Bromwich Building Society [1998] 1 W.L.R. 896; [1998] 1 All E.R. 98.
7. Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 A.C. 1101 at [14].
8. Arnold v Britton [2015] UKSC 36; [2015] A.C. 1619 at [15], per Lord Neuberger.
9. Arnold [2015] UKSC 36; [2015] A.C. 1619. See Lord Neuberger at [20]: “a court should be slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed.”
10. Arnold [2015] UKSC 36; [2015] A.C. 1619 at [21].
11. See McKillen [2012] EWCA Civ 179; [2012] B.C.C. 575 at [55].
12 Lyle & Scott Ltd v Scott’s Trustees [1959] A.C. 763 HL at 765.
13. Scotto v Petch [2001] B.C.C. 889 CA at [45], per Hale J.
14. Kawasaki (Australia) Pty Ltd v ARC Strang Pty Ltd [2008] FCA 461 FC Australia (NSW).
15. Re Coroin Ltd [2013] EWCA Civ 781; [2014] B.C.C. 14. The petition was part of the same dispute as McKillen [2012] EWCA Civ 179; [2012] B.C.C. 575, discussed at Section 5.2 below.
16.Re Coroin Ltd [2013] EWCA Civ 781; [2014] B.C.C. 14. See Arden L.J. at [39]: “In my judgment, an interest in shares would not pass under a contract for the sale of shares which is subject to a true condition precedent until the condition precedent is fulfilled.”
17. Re Ringtower Holdings Plc (1989) 5 B.C.C. 82 Ch D at 99 at [99].
18. See fn.20 below.
19. Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd [2015] WASC 242 SC Western Australia.
20. Clause 12.3C is almost identical to AIPN Optional Alternative #1. Clause 12.3F is very similar to AIPN Optional Alternative #3, save for the deletion of the APIN’s terminology “equivalent terms and conditions negotiated with the proposed Acquirer that are relevant to the acquisition of a Participating Interest for cash”. To access the AIPN Model Form of the JOA please see http://www.aipn.org/mcvisitors.aspx [Accessed 17 May 2016].
21. As a minimum, pre-emption provisions should specify that the Notice offer the interest on the same terms as set out in the third party offer, rather than simply on the same
terms.
22. A common alternative to including a two-step transfer as a trigger event is to include a provision which stipulates that an interest that has been transferred to an affiliate must be returned to the original interest holder if the transferee ceases to be an affiliate.
23. Tenneco Inc v Enterprise Products Co [1996] 925 S.W.2d 640 (Supreme Court of Texas) at 646.
24. McKillen [2012] EWCA Civ 179; [2012] B.C.C. 575.
25. See related commentary of Re Coroin Ltd [2013] EWCA Civ 781; [2014] B.C.C. 14 at Section 4 above.
26. See McKillen [2012] EWCA Civ 179; [2012] B.C.C. 575 at [40]. See also Salomon v Salomon & Co Ltd [1897] A.C. 22 HL, which established that a legally incorporated company has a distinct legal personality and is separate from its shareholders.
27. See McKillen [2012] EWCA Civ 179; [2012] B.C.C. 575 at [40].
28. Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 W.L.R. 2900 (a case that preceded Arnold [2015] UKSC 36; [2015] A.C. 1619 (see Section 3, above) which also stated that business common sense can be used as an aid to interpretation where there is ambiguity in the wording of a contractual clause).
29. See McKillen [2012] EWCA Civ 179; [2012] B.C.C. 575 at [47].
30. McKillen [2012] EWCA Civ 179; [2012] B.C.C. 575 at [50].
31. McKillen [2012] EWCA Civ 179; [2012] B.C.C. 575 at [52].
32. Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2004] VSC 477 SC Victoria Australia.
33. The SPV was not a subsidiary of SPP but SPP could appoint directors to the SPV board, which satisfied the Australian Companies Act 1981 definition of Related Corporation. Furthermore, Hollingworth J noted that, had this structure not been used, the same result could have been achieved by the route adopted in Kawasaki (assigning the interest to a wholly owned subsidiary and then selling its direct parent to a third party) or Tenneco (assigning the interest to a wholly owned subsidiary and then selling the interest owning subsidiary to a third party) (Esso Australia Resources [2004] VSC 477 at [74]–[76]).
34. Esso Australia Resources [2004] VSC 477 at [59]–[61].
35. See A. Ebsworth, “Preemptive rights clauses as restraints on alienation in joint venture agreements” (2005) 2(2) Australian Energy and Resources Law Bulletin 1, 7, who cites Beaconsfield Gold NL v Allstate Prospecting Pty Ltd [2006] VSC 310 SC Victoria and in particular Judge Hargrave J at [13]–[14].
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