Fundamentals of International Energy Transactions Shay Kuperman January 24, 2008 ©1999-2008 Vinson...
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Transcript of Fundamentals of International Energy Transactions Shay Kuperman January 24, 2008 ©1999-2008 Vinson...
Fundamentals of International EnergyTransactions
Fundamentals of International EnergyTransactions
Shay Kuperman
January 24, 2008
©1999-2008 Vinson & Elkins LLP
Shay Kuperman
January 24, 2008
©1999-2008 Vinson & Elkins LLP
Going GlobalGoing Global
• Access To Markets• Access To Resources• Favorable Regulatory Environment• Diversification
Going Global - RisksGoing Global - Risks
• Political Risk• Applicable Laws And Government Requirements• Enforceability And Dispute Resolution• Exit Strategy
Going Global – Other IssuesGoing Global – Other Issues
• Deal Structure• Tax Considerations• Practical Concerns
– Travel– Time zones– Local expertise– Employees– Cultural issues
• Insurance
Energy TransactionsEnergy Transactions
• Energy Industry segments– Upstream – Exploration and Production of Oil and Natural
Gas– Midstream – Natural Gas Transportation, Storage,
Processing, Wholesale Marketing, LNG– Downstream – Crude Oil Refining and Marketing,
Petrochemical Manufacturing– Power – Electric Power Generation and Marketing, Fuel
Procurement and Sales– Local Distribution of Electricity and Natural Gas– Oil and Gas Services
V&E’s Legal Services to the Energy IndustryV&E’s Legal Services to the Energy Industry
• Exploration and Production• Mergers, Acquisitions, and Dispositions• Joint Ventures• Project Development and Finance• Product Development• Financings
– Initial Public Offerings– Publicly Traded Debt, Rule 144a Offerings– Bank Financings
• Private Equity• Sovereign Wealth Funds• Tax Based Transactions
Going Global – V&E’s Worldwide PracticeGoing Global – V&E’s Worldwide Practice
Countries in which Vinson & Elkins L.L.P. lawyers have or have had engagements are shaded
The most recent Petroleum Economist score card ranked Vinson & Elkins as the world’s leading energy law firm
Case Study – International E&P TransactionCase Study – International E&P Transaction
• Basic Oil & Gas Agreements– Mineral Deed, Assignment, Conveyance– Oil, Gas and Mineral Lease– Concession Agreement, License, Production Sharing Contract– Participation Agreement– Operating Agreement– Farmout Agreement– Purchase and Sale Agreement– Memorandum of Understanding, Protocol, Letter of Intent, Heads
of Agreement– Gas Sales Agreement, Feedstock Supply Agreement– Transportation Agreement– Division Order– Engineering, Procurement and Construction (“EPC”) Contract– Terminal Use Agreement– Financing Agreements
International E&P Transaction – Special IssuesInternational E&P Transaction – Special Issues
• Tax Issues• Deal Structure
International E&P Transaction – Special IssuesInternational E&P Transaction – Special Issues
• Applicable Law And Government Regulations– Host Country Law– Commercial Law– Regulatory Schemes– Foreign Investment and Repatriation Rules– Currency Exchange and Controls– Relevant U.S. Law
• Foreign Corrupt Practices Act• Antitrust• Securities Laws
– Available Treaties
Tax Issues – Local Country TaxesOverviewTax Issues – Local Country TaxesOverview
• Tax Systems, in General – Tax imposed based upon residency (taxable presence)– Tax imposed based upon source (withholding taxes on cross
border payments, VAT or GST imposed on local transactions)
Taxable Presence in CountryTaxable Presence in Country
• Tax Effect of Forming a Local Company– Local companies are likely to be (automatically) treated as
having a taxable presence in country– Forming a local company may be required to contract
with/partner with a government/governmental entity
Acquisition and Divestitures –Tax ConsiderationsAcquisition and Divestitures –Tax Considerations
• Three Tax Systems Potentially Relevant• For an acquisition/disposition of an existing project,
there are potentially three tax systems that must be rationalized in determining the appropriate structure:– The tax system where the seller is resident– The tax system where the buyer is resident– The tax system where the project is located
Tax Planning Strategies/IssuesTax Planning Strategies/Issues
• Treaty-Based Holding Companies - May Be Used To Reduce Withholding Taxes: – A holding company may be organized in a jurisdiction with a
favorable tax treaty with the jurisdiction in which a project is located
– Dividends from a project company may normally be subject to withholding tax (but not if paid to the treaty-based holding company)
– The holding company’s jurisdiction may impose little or no tax on dividends/gains from sale of an interest in the project company, and may not impose withholding tax on dividends to owners of holding company
LocalCo
ForeignOwner
10% withholding tax30% withholding tax No tax: participation
exemption
0% withholding tax
TreatyHold Co
ForeignOwner
LocalCo
Treaty Holding Companies
Withholding tax burden reduced to 10%
Tax Planning Strategies/IssuesTax Planning Strategies/Issues
Tax Planning Strategies/IssuesTax Planning Strategies/Issues
• Using Tax-Haven Holding Companies– May permit collection/reinvestment of funds earned outside of
a person’s home jurisdiction without tax in the home jurisdiction
Tax Haven Companies
Tax Haven
Project Co1
Project Co2
Project Co3
Owner
reinvestment earnings
Tax Planning Strategies/IssuesTax Planning Strategies/Issues
Deal StructureDeal Structure
• Asset Purchase• Stock Purchase• Merger
Some of the Factors in Determining the Form of AcquisitionSome of the Factors in Determining the Form of Acquisition
• Will Purchaser assume or be subject to all of Target’s liabilities or only specific ones?
• Can Target’s assets be transferred to Purchaser without third party approvals?
• Are the shares of Target widely held?• Many tax and accounting issues, including whether
Purchaser will obtain a new cost basis in Target’s assets or Purchaser will take a carryover basis.
Purchaser’s GoalsPurchaser’s Goals
• Get what it paid for• Be able to get compensation if it does not get what it
paid for• Have an out from closing if assumptions prove to be
incorrect • Minimize obligations to take harmful steps to get the
deal done• Certainty of the deal
Seller’s GoalsSeller’s Goals
• Obtain maximum value• Minimize residual risks• Certainty of the deal
The Acquisition Agreement - OverviewThe Acquisition Agreement - Overview
• Parties• Recitals• Definitions• Sale and Closing• Seller’s Representations and Warranties• Purchaser’s Representations and Warranties• Covenants• Conditions• Termination• Post-Closing Remedies
The Acquisition Agreement –Choice of Law and EnforceabilityThe Acquisition Agreement –Choice of Law and Enforceability
• Choice of Law– Does the chosen law resolve common commercial questions
in a familiar way?– Does the chosen law respect the parties’ allocations of rights,
obligations and risks?
• Interpretation of Contracts– Civil versus common law systems– Commercial terms that don’t always mean what they should– Problems of applicable law that override contractual terms
• Arbitration• Enforcement of Awards
Common Drafting PitfallsCommon Drafting Pitfalls
• Use of Understood but Undefined Terms• Use of Undefined or Subjective Triggers• Indemnities• Post-closing Price Adjustments• Choice (or non-Choice) of Applicable Law• Remedies Clauses that are non-Exclusive or non-
Specific• Dispute Resolution Clauses• Confidentiality Clauses
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