OIL AND GAS PURCHASE AGREEMENTS

Transcription

1 Bracewell LLP TEI Tax School (February 2017) OIL AND GAS PURCHASE AGREEMENTS bracewelllaw.com Texas New York Washington, D.C. Connecticut Seattle Dubai London

2 Presenters: Elizabeth L. McGinley Partner (New York) Phone: Yaniv Maman Associate (Houston) Phone:

3 Part I: Overview of Purchase and Sale Agreements 3

4 The Parties: Seller: owns working interest/royalty interest and wants to dispose of interest for cash and other consideration Buyer: wants to acquire working interest/royalty interest in exchange for cash consideration and assumption of Seller obligations 4

5 Reasons for Transactions: Seller Unfavorable expectations of commodity prices Development costs exceed capital available Poor financial condition requires sale Buyer Favorable expectations of commodity prices Capital available to finance development costs Favorable financial condition allows purchase 5

6 Key Documents: Letter of intent ( LOI ) Sets out fundamental terms of transaction Purchase and sale agreement ( PSA ) Exhibits- contain list of purchased assets; allocation of values; and agreed forms of closing documents Schedules- contains exceptions to representations and warranties; set amounts of plugging and abandonment obligations Assignment and Bill of Sale 6

7 Key Provisions: List of purchased assets Purchase price and associated adjustments Confirmation of title Environmental defects Access rights; preferential purchase rights; consents to assign Representations and warranties Covenants and agreements Conditions precedent to closing Right of termination Closing; closing actions and deliverables Tax allocation and procedures Post-closing rights and obligations (i.e. indemnities) Definitions 7

8 Key Exhibits: Detailed descriptions and lists of the Purchased Assets Leases Wells Geological/geophysical information Oil and gas transportation/sale contracts Detailed descriptions and lists of the Excluded Assets Allocated Values Form of Assignment and Bill of Sale Form of Performance Bond 8

9 Key Schedules: Schedules listing exceptions to each representation and warranty Schedule listing individuals with requisite knowledge of the facts underlying representations and warranties Schedule setting out plugging and abandonment costs, pipeline removal costs, platform dismantlement and abandonment costs, and site restoration costs 9

10 Key Dates: Effective Date Adjustment Period - upward adjustments to purchase price for costs and downward adjustments for revenues Closing Date Buyer entitled to revenues and responsible for costs Seller entitled to revenues and responsible for costs Signing Date Post Closing Adjustments 10

11 Significance of Key Dates: Effective Date Tied to reserve report date or balance sheet date Date from which adjustments to purchase price for revenues, expenses, taxes, and capital investment are made Signing Date Date deposit is and rights and obligations of parties are established Closing Date Payment of purchase price Transfer of possession and risk of loss First determination of purchase price adjustments are made Date of sale for federal income tax purposes Date for Post-Closing Adjustments Final determination of purchase price adjustments are made 11

12 Part II: Forms of Transaction 12

13 Purchase of corporate stock: Taxation at shareholder level Disadvantageous for Buyer because no stepped-up basis in corporation s assets 338(h)(10) election may be available if the Seller and Buyer are both corporations Buyer must acquire at least 80% of Target s stock New 336(e) election may be available if Seller is a corporation Buyer must acquire at least 80% of Target s stock 13

14 Purchase of Partnership Interests Purchase of all outstanding partnership interests Seller considerations Under Rev. Rul. 99-6, Situation 2, Sellers are viewed as selling their partnership interests to Buyer Sellers generally recognize capital gain except to the extent of amounts realized attributable to hot assets (unrealized receivables and inventory items) Buyer considerations Under Rev. Rul. 99-6, Situation 2, Buyer treated as purchasing assets and assuming Partnership s liabilities. Obtains stepped up basis in assets and new holding period Buyer may still be purchasing an entity for state law purposes, and must be aware of potential taxes imposed on entity (i.e. franchise taxes) 14

15 Purchase of Partnership Interests: Purchase of a portion of outstanding partnership interests Seller considerations Sellers are still treated as selling partnership interests Buyer considerations Buyer treated as purchasing partnership interests from Sellers Buyer can obtain a stepped up tax basis in the assets by causing Partnership to file a section 754 election, which adjusts basis of Partnership s assets with respect to Buyer s interest No threshold required as with Section 338(h)(10) election 15

16 Part III: Tax Provisions in Oil and Gas M&A Agreements 16

17 Purchase Price Provisions: Effective Date vs. Closing Date Asset taxes (property and production taxes) typically allocated as of effective date Income taxes typically allocated as of closing date 17

18 Purchase Price Adjustments at Closing Date: Decreased for unpaid asset taxes with respect to periods prior to the effective date Increased for asset taxes paid with respect to periods on or after the effective date 18

19 Purchase Price Allocation: Parties may agree on allocation or determine allocation independently An agreement is binding on parties, but not the IRS Assumed liabilities included in purchase price for tax purposes Post-closing payments/adjustments 19

20 Tax Representations and Warranties: Functions: aid due diligence, closing condition, and basis for indemnification Materiality qualifiers Knowledge qualifiers Entity vs asset deals Disclosure schedules 20

21 Covenants Preparation of straddle period returns Filing of tax returns due after closing Control over tax audits for pre-closing periods and straddle periods Entitlement to tax refunds Allocation of transfer tax liabilities 1031 cooperation 21

22 Tax Indemnities Breach of tax representations vs. retained liability for taxes Definition of taxes- liability for affiliates and successor liability Survival period- typically applicable statute of limitations Baskets and caps- typically inapplicable Correlative adjustment provisions Tax benefit provisions Coordination with purchase price adjustments 22

23 Escrows Availability of installment method for Seller Liability for tax on income from escrowed proceeds Tax treatment of release of escrow proceeds 23

24 Part IV: Example Provisions of PSA 24

25 Definitions Asset Taxes means ad valorem, property, severance, production, sales, use and similar taxes based upon operation or ownership of the Assets or the production of Hydrocarbons therefrom. 25

26 Definitions Income Tax shall mean any federal, state or local tax measured by or imposed on, in whole or in part, the net income of Seller that was or is attributable to Seller s ownership of an interest in or the operation of the Assets. 26

27 Definitions Seller Taxes means Income Taxes imposed by any applicable Laws on Seller or any of its Affiliates, or any combined, unitary, or consolidated group of which any of the foregoing is or was a member, Asset Taxes allocable to Seller Transfer Taxes allocable to Seller; and Taxes imposed on or with respect to the ownership or operation of the Excluded Assets, 27

28 Definitions Straddle Period means any Tax period beginning before and ending on or after the Effective Date. 28

29 Definitions Tax or Taxes means Any taxes, assessments, fees, unclaimed property and escheat obligations, and other charges of any kind whatsoever imposed by any Governmental Authority, including any federal, state, local and/or foreign income tax, surtax, remittance tax, presumptive tax, net worth tax, special contribution tax, production tax, value added tax, withholding tax, gross receipts tax, windfall profits tax, profits tax, ad valorem tax, personal property tax, real property tax, sales tax, goods and services tax, service tax, transfer tax, use tax, excise tax, premium tax, stamp tax, motor vehicle tax, entertainment tax, insurance tax, capital stock tax, franchise tax, occupation tax, payroll tax, employment tax, unemployment tax, disability tax, alternative or add-on minimum tax and estimated tax, Any interest, fine, penalty or additions to tax imposed by a Governmental Authority in connection with any tax described above Any liability in respect of any item described above, that arises by reason of a contract, assumption, transferee or successor liability, operation of Law (including by reason of participation in a consolidated, combined or unitary Tax Return) or otherwise. 29

30 Definitions Tax Return shall mean any report, return, information statement, schedule, attachment, payee statement or other information required to be provided to any Governmental Authority with respect to Taxes or any amendment thereof, including any return of an affiliated, combined or unitary group, and any and all work papers relating to any Tax Return. 30

31 Definitions Transfer Taxes are any sales, purchase, transfer, stamp, documentary stamp, registration, use or similar taxes 31

32 Excluded Assets Seller retention of refunds with respect to Seller Taxes claims of Seller for refunds or loss carryforwards with respect to (i) Income Taxes imposed on Seller or any of its Affiliates, (ii) Asset Taxes allocated to Seller or (iii) Taxes imposed on or with respect to the Excluded Assets 32

33 Purchase Price Adjustments Increases/Decreases Increased by the amount of all Asset Taxes allocable to Buyer but paid by Seller (or any of its Affiliates) prior to Closing Decreased by the amount of all Asset Taxes allocable to Seller that have not been paid prior to Closing Estimates in lieu of final numbers To the extent the actual amount of an Asset Tax is not determinable at the time an adjustment to the Purchase Price is to be made with respect to such Asset Tax pursuant, (i) the Parties shall utilize the most recent information available in estimating the amount of such Asset Tax for purposes of such adjustment, and (ii) upon the later determination of the actual amount of such Asset Tax, timely payments will be made from one Party to the other to the extent necessary to cause each Party to bear the amount of such Asset Tax that is allocable to such Party. 33

34 Purchase Price Allocation Typically follows Allocated Values for title defect purposes: Seller and Buyer shall report the transactions contemplated by this Agreement consistently with Allocated Values Schedule, as adjusted by the Parties, on any Tax Return, including Internal Revenue Service Form 8594, Asset Acquisition Statement, and will not assert, and will cause their Affiliates not to assert, in connection with any tax audit or other proceeding with respect to Taxes, any asset values or other items inconsistent with such allocation except with the agreement of the other Parties or as required by applicable Law. 34

35 Seller s Tax Representations and Warranties All Tax Returns required to be filed by Seller or otherwise related to the Assets or have been duly and timely filed and such Tax Returns are true, correct and complete in all material respects All Taxes owed by Seller or otherwise related to the Assets for which the Buyer may be liable that are or have become due have been paid in full All withholding tax requirements imposed on or with respect to Seller or the Assets have been satisfied in full in all material respects 35

36 Seller s Tax Representations and Warranties Seller does not have in force any waiver of any statute of limitations in respect of Taxes or any extension of time with respect to a Tax assessment or deficiency No extension of time within which to file any Tax Return with respect to the Assets is currently in effect 36

37 Seller s Tax Representations and Warranties There are no Liens on any of the Assets currently existing, pending or, to the knowledge of Seller, threatened with respect to any Assets related to any unpaid Taxes There are no pending or active audits or legal proceedings involving Tax matters or, to the knowledge of Seller, threatened audits or proposed deficiencies or other claims for unpaid Taxes of Seller 37

38 Seller s Tax Representations and Warranties No Asset is subject to a Tax partnership agreement or provision requiring a partnership income Tax Return to be filed under applicable Law, and any Tax partnership listed on Schedule [ ] has, or as of Closing shall have, in effect an election under Section 754 of the Code that will apply with respect to the acquisition by Buyer of the Assets. 38

39 Deliverables at Closing FIRPTA Certificate At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by Buyer of its obligations pursuant to this Agreement, Seller shall deliver or cause to be delivered to Buyer, among other things, the following: a certificate of non-foreign status of Seller meeting the requirements of Treasury Regulation Section (b)(2) 39

40 Tax Matters Section Allocation of Asset Taxes between Parties Seller shall be allocated and bear all Asset Taxes attributable to (A) any Tax period ending prior to the Effective Date and (B) the portion of any Straddle Period ending immediately prior to the Effective Date. Buyer shall bear and be allocated all Asset Taxes attributable to (A) any Tax period beginning on or after the Effective Date and (B) the portion of any Straddle Period beginning on the Effective Date. 40

41 Tax Matters Section Allocation of Asset Taxes between portions of a Straddle Period Asset Taxes that are attributable to the severance or production of Hydrocarbons shall be allocated to the period in which the severance or production giving rise to such Asset Taxes occurred, Asset Taxes that are based upon or related to income or receipts or imposed on a transactional basis (other than such Asset Taxes described above), shall be allocated to the period in which the transaction giving rise to such Asset Taxes occurred, and Asset Taxes that are ad valorem, property or other Asset Taxes imposed on a periodic basis pertaining to a Straddle Period shall be allocated between the portion of such Straddle Period ending immediately prior to the Effective Date and the portion of such Straddle Period beginning on the Effective Date by prorating each such Asset Tax based on the number of days in the applicable Straddle Period that occur before the Effective Date, on the one hand, and the number of days in such Straddle Period that occur on and after the Effective Date, on the other hand. 41

42 Tax Matters Section Transfer Taxes To the extent that any Transfer Taxes are payable by reason of the sale of the Assets under this Agreement, such Transfer Taxes shall be borne and timely paid by Buyer. Buyer and Seller shall reasonably cooperate in good faith to minimize, to the extent permissible under applicable Law, the amount of any such Transfer Taxes. 42

43 Tax Matters Section Tax Cooperation The Parties shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns and any audit, litigation, or other proceeding with respect to Taxes relating to the Assets. Such cooperation shall include the retention and (upon another Party s request) the provision of records and information that are relevant to any such Tax Return or audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided under this Agreement. Seller and Buyer agree to retain all books and records with respect to Tax matters pertinent to the Assets relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations of the respective taxable periods and to abide by all record retention agreements entered into with any Governmental Authority. 43

44 Tax Matters Section Section 754 Elections Seller shall, prior to the Closing, cause each Asset treated as being held by a partnership for federal income tax purposes to have in effect an election under Section 754 of the Code for any taxable year that includes the Closing Date. 44

45 Tax Matter Section 1031 Like-Kind Exchange Cooperation Seller and Buyer agree that either or both of Seller and Buyer may elect to treat the acquisition or sale of the Assets as part of an exchange of like-kind property under section 1031 of the Code. Each Party agrees to use reasonable efforts to cooperate with the other Parties in the completion of such an exchange including an exchange subject to the procedures outlined in Treasury Regulation section (k)-1 and/or Internal Revenue Service Revenue Procedure Each of Seller and Buyer shall have the right at any time prior to Closing to assign its rights under this Agreement to a qualified intermediary (as that term is defined in Treasury Regulation Section (k)-1(g)(4)(v)) or an exchange accommodation titleholder (as that term is defined in Internal Revenue Service Revenue Procedure ) to effect an exchange. 45

46 Tax Matter Section 1031 Like-Kind Exchange Cooperation (continued) In connection with any such exchange, any exchange accommodation title holder shall have taken all steps necessary to own the Assets under applicable law. Each Party acknowledges and agrees that neither an assignment of a Party s rights under this Agreement nor any other actions taken by a Party in connection with the exchange shall release any Party from, or modify, any of their respective liabilities and obligations (including indemnity obligations to each other) under this Agreement, and no Party makes any representations as to any particular tax treatment that may be afforded to any other Party by reason of such assignment. Any Party electing to treat the acquisition as an Exchange shall be obligated to pay all additional costs incurred as a result of the exchange, and in consideration for the cooperation of the other Parties, the Party electing Exchange treatment shall agree to pay all costs associated with the exchange and to indemnify and hold each other Party, harmless from and against any and all liabilities and taxes arising out of the exchange that would not have been incurred but for the electing Party s exchange election. 46

47 caused by, arising out of, or resulting from, Seller s breach of any of Seller s covenants or agreements contained in Article 6 Indemnification Indemnification for Seller Taxes From and after Closing, Seller shall indemnify, defend, and hold harmless Buyer and its Affiliates and its and their respective officers, directors, employees, and agents from and against all Damages incurred or suffered: caused by or arising out of, or resulting from, Seller Taxes caused by, arising out of, or resulting from, any breach of any representation or warranty made by Seller contained in Article [ ] of this Agreement, or representations made in the FIRPTA certificate. 47

48 Indemnification Time limitations on indemnification Time limit for claims with respect to tax representations- The tax representations and warranties of Seller shall survive the Closing until thirty (30) days following the expiration of the applicable statute of limitations period (including any extensions thereof). Time limit for claims with respect to Seller Taxes- Any claim for indemnification with respect to Seller Taxes shall survive the Closing until thirty (30) days following the expiration of the applicable statute of limitations period (including any extensions thereof). 48

49 Indemnification Monetary limitations on indemnification No Party shall have any liability for any indemnification for an individual matter until and unless the amount of the liability for Damages with respect to which such Party admits (or it is otherwise finally determined) that such Party has an obligation to indemnify the other Party exceeds $[ ] (the Individual Indemnity Threshold ). Without limiting the foregoing, no Party shall have any liability for any indemnification until and unless the aggregate amount of the liability for all Damages (which exceed the Individual Indemnity Threshold) exceeds [ ]% of the Unadjusted Purchase Price, and then only to the extent such Damages exceed [ ]%) of the Unadjusted Purchase Price Notwithstanding anything to the contrary contained elsewhere in this Agreement, Seller shall not be required to indemnify Buyer for aggregate Damages in excess of [ ]% of the Unadjusted Purchase Price 49

50 Indemnification Monetary limitations on indemnification (continued) Exclusion for tax representations and warranties and Seller Taxes- provided, however, that this Section shall not limit indemnification for Seller Taxes or breaches of Seller s tax representations and warranties 50

51 Indemnification Definition of Damages: Damages shall not include any adjustment for Taxes that may be assessed on payments under this Indemnification Section or for Tax benefits received by the Indemnified Person as a consequence of any Damages 51

52 Questions? 52