The decision earlier this year in Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd1 is a timely reminder to be careful in drafting and complying with pre-emptive rights clauses.

Background

In 2010, Santos Offshore Pty Ltd (Santos), Apache Oil Australia Pty Ltd, Apache East Spar Pty Ltd and Apache Kersail Pty Ltd (together theApache Parties) entered into a Sale and Purchase Agreement and a Joint Operating Agreement (JOA) in relation to a Petroleum Retention Lease (later converted into a Petroleum Production Licence). Clause 12.3 of the JOA established the procedure that was to be followed in the event of a change in control of any party.  The clause required the Apache Parties to issue a notice to each of the other JOA parties (i.e. Santos) that disclosed the final terms and conditions as were relevant to the Apache Parties’ participating interests and the Apache Parties’ determination of the ‘Cash Value’ of their participating interests. 

Santos would then have a right to acquire the Apache Parties’ participating interests on certain terms and conditions.

On 15 May 2015, the Apache Parties each issued a notice to Santos (Notices) on substantially identical terms.  The Notices purported to comply with the requirements of clause 12.3 of the JOA, advising of the proposed change in control and offering to sell their relevant participating interests in the JOA to Santos on the terms and conditions set out in the Notices.  Santos claimed that a number of the conditions failed to comply with clause 12.3 of the JOA, and on this basis the Notices were invalid.  Santos sought a declaration to that effect and orders requiring the Apache Parties to specifically perform their obligations under the JOA by issuing Notices in compliance with clause 12.3 of the JOA. 


The decision

Justice Pritchard held that each of the Notices failed to comply with the requirements of clause 12.3 of the JOA and were invalid. Further, her Honour found that the invalid terms and conditions in the Notices could not be severed from the Notices and accordingly the Notices were entirely invalid.2

In making her decision, Justice Pritchard noted that the courts have recognised the need for caution in adopting a construction of pre-emptive rights clauses that would restrict their operation or permit their application to be avoided and thus erode the benefit conferred by the grant of a right of pre-emption.3   

For the same reason, pre-emptive rights clauses have been construed so as not to render it impossible for a joint venturer to satisfy the requirements of the offer.4

In determining the meaning of clause 12.3 of the JOA, Justice Pritchard found: 

In April 2015, Viraciti Energy Pty Ltd (Viraciti) entered into an agreement with Apache International Finance II SARL, Apache Finance Pty Ltd, Apache Ravensworth Corporation LDC and certain other companies under which, amongst Clause 12.3 of the JOA established the procedure that was to be followed in the event of a change in control of any party.  The clause required the Apache Parties to issue a notice to each of the other JOA parties (i.e. Santos) that disclosed the final terms and conditions as were relevant to the Apache Parties’ participating interests and the Apache Parties’ determination of the ‘Cash Value’ of their participating interests. 

Santos would then have a right to acquire the Apache Parties’ participating interests on certain terms and conditions. 

On 15 May 2015, the Apache Parties each issued a notice to Santos (Notices) on substantially identical terms. The Notices purported to comply with the requirements of clause 12.3 of the JOA, advising of the proposed change in control and offering to sell their relevant participating interests in the JOA to Santos on the terms and conditions set out in the Notices.  Santos claimed that a number of the conditions failed to comply with clause 12.3 of the JOA, and on this basis the Notices were invalid.  Santos sought a declaration to that effect and orders requiring the Apache Parties to specifically perform their obligations under the JOA by issuing Notices in compliance with clause 12.3 of the JOA. 

The decision

Justice Pritchard held that each of the Notices failed to comply with the requirements of clause 12.3 of the JOA and were invalid. Further, her Honour found that the invalid terms and conditions in the Notices could not be severed from the Notices and accordingly the Notices were entirely invalid.2

In making her decision, Justice Pritchard noted that the courts have recognised the need for caution in adopting a construction of pre-emptive rights clauses that would restrict their operation or permit their application to be avoided and thus erode the benefit conferred by the grant of a right of pre-emption.3 

For the same reason, pre-emptive rights clauses have been construed so as not to render it impossible for a joint venturer to satisfy the requirements of the offer.4

In determining the meaning of clause 12.3 of the JOA, Justice Pritchard found: other things, Viraciti acquired all of the shares in Apache Energy Limited, the parent of the Apache Parties. 

Clause 12.3 of the JOA confers a pre-emptive right on the parties to purchase the interest of another party in the joint venture in the event that there is to be, amongst other things, a change in control of that party.

  • The ‘final terms and conditions as are relevant to the participating interests’ will be those which bear upon, or operate upon, or are otherwise closely connected or related to, the participating interest, and to its acquisition by the acquiring party.5
  • The phrase ‘on equivalent terms and conditions set out in the notice for cash’ operates in relation to the determination of consideration to be paid for each participating interest.  It applies so as to result in an equivalent cash price for the acquisition of each participating interest, rather than in such other form of consideration as may have applied.6
  • The only modifications which may be made to the terms and conditions are modifications:
  1. that are necessary to reflect the fact that the offer in the notice is an offer by the acquired party to sell only the participating interest to the other parties to the JOA; and
  2. that make it clear that the participating interest will be acquired for cash, rather than on the basis of another form of consideration as may have been contemplated.7 

Conclusion

It is important to remember that the precise terms of a pre-emptive right clause must be considered and complied with when a party is required to issue a pre-emption notice.  Failure to strictly comply with these contractual requirements may lead to lengthy, costly and unnecessary litigation.