Em Emerging ng Issues ues i in A&D Transacti ctions ns - - PowerPoint PPT Presentation

Em Emerging ng Issues ues i in A&D Transacti ctions ns

Oct ctober er 20, 2016 20, 2016

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Insolvent or Financially Distressed Vendors

2.

Recent Changes to Alberta’s LMR

3.

AER Pipeline Transfers

4.

Closing in Escrow

5.

White Map Transactions

6.

Multi-Asset Transactions for $1.00

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CCA CCAA (Companies’ Creditors Arrangement Act)

• available to insolvent companies owing more than $5million; offering

short term protection from their creditors so they can restructure their business and financial affairs

• CCAA proceedings are carried out by a Monitor under supervision of the

courts and as part of the Vendor’s restructuring plan asset dispositions are subject to the court’s approval and a subsequent Vesting Order Ban ankruptcy y

• legal process designed to relieve insolvent debtors of their debts and

usually carried out by a Bankruptcy Trustee Recei Receivership

• Receivers are appointed by a secured creditor under the terms of a general

security agreement (loan agreement) or by the court where a secured creditor is enforcing his security and acting under a court order authorizing the appointment of a receiver

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Implic plication tions:

 There will be very limited, if any, recourse against the vendor

(Monitor/Trustee/Receiver) after closing and a condensed post- closing adjustment period, if any

 Conduct thorough due diligence (title, environmental,

• perational)

 Where the vendor’s financial situation is questionable but not

formally designated as insolvent or under creditor protection, consider setting-off amounts owing by the vendor against the purchase price

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Alberta Court of Queen’s Bench Redwater decision, May 29, 2016:

• Court found that receivers and trustees of AER licenses may

selectively disclaim unprofitable assets (and their associated abandonment and reclamation obligations) under the federal Bankruptcy and Insolvency Act (BIA)

• Provincial legislation, e.g. AER abandonment and reclamation
• bligations, are inoperative to the extent they conflict with the

BIA

• Receivers and trustees are effectively permitted to avoid AER

abandonment and reclamation obligations

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Impact of the Redwater decision, effective July 8, 2016:

• AER will consider and process all applications for license eligibility as

non- routine and may exercise its discretion to refuse applications or impose terms and conditions depending on the circumstances

• For holders of existing but unused license eligibility approvals AER may

require evidence there have been no material changes since approving license eligibility

• Transferee must have an LMR of 2.0 or higher immediately following the

transfer or provide evidence that it will be able to meet its obligations throughout the life cycle of energy development with an LMR of less than 2.0 These are considered interim measures while the AER re-evaluates its licensing requirements to ensure that existing and future Licensees fulfill their environmental duties

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Implic plication tions:

 Post security with the AER  Address existing abandonment obligations  Transfer additional “positive” assets  Some companies will be ineligible to hold licences and some

companies that were considered eligible in the past may no longer be eligible

 Inability to transact and transactions will not go forward

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• Effective April 1, 2016 AER amended its pipeline license transfer

application process such that both the Transferor and Transferee must agree to 2 statements before the AER will process the transfer:

• Transferor must confirm it has collected and retained all

records required under the CSAZ662: Oil and Gas Pipeline Systems Code and Pipeline Rules and that it has provided such records to Transferee; and

• Transferee must confirm it has received such records from

Transferor and that Transferee is responsible for producing these records on request of AER. Failure to do so constitutes a non-compliance of AER requirements.

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Implic plication tions:

 Unless Transferor and Transferee agree to the statements

pipeline licenses will not be transferred with the AER

 Transferor and Transferee must come to an agreement as to

what pipeline records may be required under CSA Z662 and Pipeline Rules

 Once a license is transferred, the risk of being non-compliant

with the AER lies with the Transferee

 Does Transferor have such agreed upon pipeline records?  If no, or records are lost or missing, an engineering assessment

proving the pipeline is fit for service may be required

 A matter for negotiation between Transferor and Transferee on

how to handle

 High-grade and prioritize the pipelines that should be

transferred first

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• Provides for a way to close on a substantive portion of the assets

while the remainder of the assets are held back

• Assets that are held back are held in “escrow” and executed specific

conveyance documents and monies specific to such escrowed assets are held by an escrow agent (usually a law firm) and are not released until the escrow condition(s) is satisfied or fulfilled

• Most commonly used for assets subject to outstanding Rights of

First Refusal (ROFR)

• Escrow provisions and an Escrow Agreement are provided for in the

PSA

• Can proceed to close on the remaining non-escrowed assets

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• If the escrow condition is satisfied or fulfilled, the escrow agent

releases the specific conveyance documents to the Purchaser, the monies to the Vendor and possession of the assets is then passed onto the Purchaser

• If the escrow condition is not satisfied or fulfilled, the escrow

agent returns the executed specific conveyance documents to the Vendor, the monies returned to the Purchaser and closing does not occur on those assets

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Implic plication tions:

 No need to delay closing on ALL the assets of a transaction when

• nly a smaller subset of those assets are subject to an
• utstanding condition

 Vendor gets substantial portion of the purchase price and

purchaser gets possession of most of the assets without having to wait

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• Vendor divesting itself of all its interests (assets and liabilities)

within a geographical boundary

• Vendor “wants out” of an area
• Purchaser acquires all of Vendor’s interests within the

geographical boundary whether such interests are scheduled to the PSA or not (there can be exceptions)

• Becoming more pervasive and expected to continue

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Implic plication tions:

 Vendor will generally have a good understanding of its inventory

• f assets and liabilities, but white-mapping itself out of an area

helps to ensure it relinquishes itself of any potential unknown liabilities as well

 Purchaser takes on the risk of any unknown liabilities  Possibly agree to shrink the white map boundary  Assess the risk - how familiar is the Purchaser with the assets?

Pull all available public data on what is registered in Vendor’s name (wells, facilities, pipelines, surface leases), including affiliates/predecessors in interest, within the white map

• boundary. Compile a list of any additional tangibles discovered

as a result of such searches and provide to the evaluation team

 “No” to white mapping

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• Transactions where the assets, in the aggregate, are valued at a

nominal value

• As currently owned/operated by the Vendor, the negative

liabilities associated with the assets may be close to meeting or exceeding any positive value of the assets

• Vendor sheds itself of assets that negatively impact its balance

sheet

• Purchaser acquires assets that Purchaser believes will generate

value (e.g. existing infrastructure, economies of scale, lower op costs)

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Implic plication tions:



PSA should acknowledge that the purchase price reflects the sum of the positive value of the assets as well as the “offsetting reductions in value” for environmental liabilities associated with the assets

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Need to identify any deficiencies up-front as there is no mechanism for purchase price adjustments if any deficiencies are found

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All due diligence (title, environmental, site/operational) should be undertaken by Purchaser prior to entering into the PSA

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Assets subject to ROFR are valued in the normal course

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PSA should address what happens if a third party exercises a ROFR, i.e. ROFR monies received by Vendor to be paid to Purchaser, to keep Vendor and Purchaser whole. Purchaser is paying good and valuable consideration for the assets (i.e. taking on the liabilities) and Vendor was never to receive cash

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Vendor’s liability should not be capped by the $1.00 purchase price as Purchaser is paying good and valuable consideration for the assets

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