When is an Oil and Gas Joint Venture Interest a Security?

When is an Oil and Gas Joint Venture Interest a Security?

The recent case of SEC v. Arcturus, decided by the U.S. Court of Appeals for the Fifth Circuit, tackled that very question. I wrote about that case in an article published in the November 2019 issue of the Dallas Bar Association's "Headnotes" newsletter. The article is titled, surprisingly enough, "When is an Oil and Gas Joint Venture Interest a Security?"  It is available here.

The Death of County-Level Assumed Name Certificates

Good news for corporations (and limited partnerships, limited liability partnerships, limited liability companies, and foreign filing entities) using assumed names in Texas and their attorneys.  Effective September 1, 2019, they will no longer be required to file assumed name certificates at the county level.

As I have blogged about in the past, Texas law previously required companies operating under an assumed name to file an assumed name certificate with both the Secretary of State and in the appropriate Texas county. I always thought the county level filing was a big waste of time. Once the state level filing had been made, the entire state had been placed on notice who was using the assumed name - so why the need to file the same information again at the county level? To make matters worse, the county level filing was required to be notarized, which added another sometimes cumbersome step in the process. Fortunately, the Texas legislature seems to have agreed and rationalized its assumed name certificate rules.

The new law (HB 3609 in the 86th legislative session) and is available to read here.

Frequently negotiated deal terms in M&A transactions

Thanks to the Fort Worth Business Press for publishing my article below, which is available on the FWBP website here.

Frequently negotiated deal terms in M&A transactions

As any experienced merger and acquisition (M&A) professional can attest, some deal points get negotiated in virtually every M&A transaction. Sure, every transaction is unique. But M&A transactions are like love songs; as Randy Travis tells us: “Every one is different and every one’s the same.”

An M&A transaction involves the buyer and the seller entering into a purchase agreement. As part of the purchase agreement, the seller will make a series of representations and warranties about the condition of the seller’s company and its assets.

If those representations and warranties are not true, the buyer may make a claim against the seller for a breach of contract. That’s called seeking indemnification. The purchase agreement may limit the buyer’s ability to seek indemnification claims against the seller.

The tension between the buyer’s desire to know exactly what it is buying (and be protected if the seller’s company does not live up to the buyer’s expectations) and the seller’s desire to limit its exposure to post-closing indemnification liability is the source of many of the frequently negotiated deal points.

Survival Period

How long after the closing should the buyer be able to seek indemnification from the seller for an alleged breach of one or more of the seller’s representations or warranties in the purchase agreement? That time period is called the survival period. As you might expect, sellers would like the survival period to be as short as possible (ideally, none). The buyer wants the survival period to be as long as possible.

Indemnification Basket

After the closing, the seller does not want to hear about every tiny issue that the buyer may have with the company. Often, the buyer and seller will agree that the buyer cannot seek indemnification from the seller for an alleged breach of one or more of the seller’s representations or warranties until the buyer’s damages for such breaches exceed an agreed-upon dollar amount. That’s called an indemnification basket.

Indemnification Cap

Similarly, the seller will seek to have the purchase agreement include a limit on the seller’s maximum exposure for potential indemnification claims from the buyer. That is called an indemnification cap.

Holdbacks/Escrow

The buyer may be concerned that the seller will be unwilling or unable to pay indemnification claims after the closing – or that pursuing such an indemnification claim will be prohibitively expensive. If so, the buyer may seek to have the purchase agreement include a provision that the buyer will hold back a portion of the purchase price for a period of time until the buyer confirms that the seller’s representations and warranties were correct. If the seller agrees not to accept all of the purchase price at the closing, the seller might insist that rather than holding back a portion of the purchase price, that amount should instead be delivered to an independent third party that will hold the funds in escrow.

Qualifiers

While the buyer will want the seller’s representations and warranties to be as broad and unqualified as possible, the seller will prefer for the seller’s representations and warranties to be qualified so they only apply to matters that are “material” or to matters of which the seller has actual “knowledge.”

Sandbagging

What if the buyer knew that the seller’s representations and warranties were not true before the purchase agreement was ever signed or the deal was closed? That’s called “sandbagging.” The seller will seek to include an anti-sandbagging provision in the purchase agreement that provides that the buyer cannot seek indemnification from the seller for representations and warranties that the buyer knew were untrue. The buyer will resist including an anti-sandbagging provision.

Conclusion

There are no right or wrong answers to how any of these issues should be addressed in the purchase agreement – it depends on the relative bargaining power of the buyer and the seller and how willing each side is to fight for its preferred position. Regardless, it is helpful to know the landscape of the issues that will be addressed. And it is helpful to have experience dealing with these issues and with how other buyers and sellers in the market have ultimately reached agreement on these frequently negotiated issues.

Praise for Acceleration

For anyone interested in corporate and securities law as it relates to startup companies, I would recommend "Acceleration: What All Entrepreneurs Must Know About Startup Law," a new book by Ryan Roberts. Ryan is a longtime friend of mine and an outstanding corporate lawyer.  In fact, his blog, www.startuplawyer.com, was one of the inspirations for this blog.

Ryan does a great job of cutting through the clutter to deliver sound advice in an understandable, entertaining, and informative way. The book is available on Amazon here.  It looks like this:

Fort Worth Inc. Top Attorney

Thanks to Fort Worth Inc. magazine for including me in their list of Top Attorneys for 2018 (published in their Jan/Feb 2019 issue). I was included in their "annual listing of the best lawyers in town" in the Corporate Finance/Mergers & Acquisitions category.