Found an interesting article written by Jones Day on the North Sea
Pre-emption Arrangements Most North Sea projects are structured as unincorporated joint ventures, and the applicable joint operating agreements (JOAs) will usually have in place some provisions restricting the parties’ freedom to transfer interests, typically through pre-emption rights.
The Master Deed is an agreement between the Secretary of State and companies active in the North Sea who have signed a deed of adherence to the Master Deed and was established in 2003 following concerns that pre-emption provisions in existing JOAs were restricting new entrants into the North Sea and inhibiting the realignment of licence interests. Although adherence to the Master Deed is optional, the vast majority of companies currently operating in the North Sea are party to it.
he Master Deed sets out new pre-emption arrangements to apply in respect of existing JOAs which contain pre-emption provisions. The new arrangements will not be imported into JOAs not already containing pre-emption provisions and will not replace the existing arrangements of those JOAs that do, but the new arrangements will take priority in the event of any inconsistency with existing pre-emption terms.
Under the new arrangements, upon entering into negotiations or making a bona fide decision to transfer an interest under a JOA a party may give notice of such intention to transfer to the other JOA parties, who will have 7 business days to reserve or waive their pre-emption rights. If any of the other JOA parties do not expressly waive their pre-emption rights within the 7 day period, or if the notice of intended transfer was not given, then the transferring party must give notice to those other JOA parties upon reaching an agreement to transfer its interests. The other JOA parties will then have 30 days to exercise their rights of pre-emption.
The new pre-emption arrangements in the Master Deed are part of a drive by the DTI to remove commercial and behavioural barriers to the development of the North Sea. As part of this drive, the Secretary of State has also announced that as of the 20th offshore licensing round in 2002 new JOAs are not permitted to contain pre-emption provisions unless the contracting parties can advance a compelling case as to why they are necessary. If the DTI gives its approval to the inclusion of pre-emption provisions, only the new pre-emption arrangements set out in the Master Deed may be incorporated into the JOA.
Investors in North Sea interests will be concerned by the risk of having their acquisition pre-empted by existing JOA parties, especially once they have invested substantial sums of money in conducting due diligence into those assets.
For this reason acquisitions are sometimes structured as share sales so as to avoid triggering pre-emption provisions associated with asset transfers. However, most JOAs in the North Sea extend the application of pre-emption rights to a change of control. It is often necessary therefore to create more innovative acquisition structures so as to disapply pre-emption rights. The new pre-emption arrangements under the Master Deed, for example, will not apply to transfers of JOA interests in consideration for shares or other exchanges of interests not converted into money sums. Non-monetary consideration may also make it difficult for existing JOA parties to match a purchase offer and therefore be unable to be pre-empted, and packaging multiple interests together with the target assets may serve to dissuade existing JOA parties from exercising their rights.
If the parties to the proposed transfer cannot avoid the application of the pre-emption rights they may wish to, and certainly it would be in an investor’s best interest to, seek a binding waiver of pre-emption rights from the existing JOA parties. If such a waiver were forthcoming the investor could proceed with the certainty that its expenses in furthering the acquisition will not be incurred in vain, although if the waivers do not materialize then the vendor may lose the investor’s interest and find the existing JOA parties unwilling to make a firm bid for the assets on their own. If an early waiver of pre-emption rights is not forthcoming then the sale and purchase agreement will need to provide for the eventual waiver of pre-emption rights as a condition precedent to the sale proceeding.
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