Representations and warranties (“R&Ws”) are a critical component of any energy asset acquisition and serve to allocate risk between buyer and seller. By broadening the scope of R&Ws, buyers can increase information disclosure from a seller and reduce risk associated with the unknown. Vice Chancellor Strine of the Delaware Court of Chancery summarized it well, "Due diligence is expensive and parties to contracts in the mergers and acquisitions arena often negotiate for contractual representations that minimize a buyer's need to verify every minute aspect of a seller's business.” Cobalt Operating, LLC v. James Crystal Enters., LLC, No. Civ.A. 714-VCS, 2007 WL 2142926, at *28 (Del. Ch. August 20, 2007). Sellers, of course, typically attempt to limit the scope of R&Ws to avoid or at least minimize the costs associated with their post-closing obligations and indemnities. In addition to the “standard” R&Ws (e.g., corporate authority and approvals, financial statements, etc.), parties to an energy M&A transaction are likely to discuss certain additional R&Ws. These energy R&Ws are grouped below according to the type of asset being acquired, though many are applicable to more than one sector.
- Seismic/Geographical Data - Buyers will want copies of all reserve reports, seismic, geological, geophysical, engineering, and other technical data to verify the value of assets and will want the right to use such data in its operation of related assets. This R&W may include a list of all agreements covering the use or ownership of such data, restrictions on its future use, and a warranty that seller has provided buyer with true copies of the data.
- Well/Platform Conditions - Similar to a typical “sufficiency of assets” R&W, buyers will want schedules depicting the status of all wells and platforms. This R&W may include separate lists for wells or platforms that are non-producing, offline, or producing at rates not detailed in reports. A buyer may request a representation relating to obligations seller has to plug or abandon an existing well and certification of production data.
Mid-Stream (Gas Storage, Pipeline, and Gathering Companies)
- Natural Gas Inventories - For gas storage facilities, this R&W may include volumes of base (“pad”) gas owned (recoverable and non-recoverable), base gas parked by customers, and customer gas injected and stored.
- Take or Pay Arrangements - This R&W typically states that seller has not entered into any take-or-pay or forward sale arrangements obligating buyer to make deliveries of gas after closing without receiving full payment for such deliveries.
- Imbalances - This R&W typically discloses imbalances in gas volumes received and delivered and miscalculations under any natural gas gathering, processing, or treating contract that would give rise to a material liability.
- Governmental Regulations - In addition to the typical “compliance with laws” R&W, this R&W typically includes references to which regulatory bodies seller or its assets are subject (e.g., FERC, State Public Utility Commission). In the gathering context, this R&W may include a statement that the system is not subject to regulation by such bodies.
- Inventories - Buyers typically want inventory information to verify asset values and to ensure on-going operations and may ask for a listing of storage tanks and related inventory information.
- Condition of Assets - Although applicable to purchase agreements generally, this R&W is particularly important in the downstream context and includes a statement that all tangible assets are in working order and operating condition.
General Energy R&Ws
There are a host of R&Ws that are generally applicable to M&A transactions but may be modified for energy transactions. These include R&Ws related to material contracts, title to property, employee issues (such as labor unions and historical retention), intellectual property, compliance, environmental, and tax matters. With respect to material contracts, buyer may request listings of, or statements regarding, seller-specific agreements such as swap, option, hedge, futures, or similar instruments or arrangements. Due to the varying legal landscape concerning ownership of oil and gas, the “title to property” R&W is fundamental to energy transactions. In the upstream context, the title R&W may include statements confirming seller's (or third party's) working interest, mineral and royalty interests, overriding royalty interests, and development and production obligations. In midstream transactions, the title R&W may include information relating to easements and rights-of-way. If seller is involved in operations abroad, buyer may seek representations related to the Foreign Corrupt Practices Act and transactions involving prohibited persons or territories.
The R&Ws discussed in this article do not constitute a comprehensive list of the R&Ws that may be included in a purchase agreement. Many may simply serve as discussion points during the negotiation and due diligence process of an energy M&A transaction and not be included in the final agreement.
The views expressed in this article are those of the authors.