The proposed ExxonMobil/Seplat share acquisition brings to light two issues: the impact a preemptive clause under a joint operating agreement (JOA) is likely to have on merger and acquisition transactions (M&A), and the competent authority to consent to such a transaction in the Nigerian oil and gas industry.
Since its early inception, the Nigerian oil and gas industry has adopted different types of petroleum contract agreement, amongst which is the unincorporated joint venture. According to Investopedia, a joint venture (JV) is an arrangement in which two or more parties combine their resources to accomplish a specific task. The inclusion of a pre-emptive clause for the participating entities in a JV is usual, and the triggering events and scope of this clause depend on the terms of the agreement.
As a background, a 1990 joint operating agreement (JOA) which was renewed in 2009 granted leases of shallow water to Mobil Producing Nigeria Unlimited (MPNU) and entitled the participating entities to pre-emptive rights with regard to the transfer of participating interests in the JV. This preemptive right is such that the other party must be notified of a third party’s offer, furnished with the details of the third party and the proposed assignment or transfer, and given the right of first refusal to purchase the participating interest on the same or similar terms (Article 19.4).
Premised on this, the Nigerian National Petroleum Company Limited intending to exercise its right of first refusal has obtained an interim injunction with regards to the proposed share acquisition of MPNU by Seplat Energy Plc.
The mandatory shareholder’s pre-emptive right is statutorily recognised in Nigeria (refer to section 142 of the Companies and Allied Matters Act 2020) but the pre-emptive rights of participating entities in a JV emanate from the contractual documents and the Courts are usually inclined to give effect to the intention of the contracting parties- pacta sunt servanda (the agreement must be kept).
While the outcome of the NNPC-MPNU suit is still awaited, this piece examines pre-emptive clauses in terms of their scope, effect, triggering events and possible circumvention.
Preemptive rights refer to the right available to shareholders to maintain their ownership stake by giving them the chance to buy a proportional interest in any additional issuance of common stock in the future. Preemptive rights afford existing shareholders to maintain their proportion of ownership of a company by acquiring their proportional share of any additional stock issuances by the Company. This right ensures that a shareholder’s ownership interest is not diluted through the issuance of more shares
A preemptive provision might be triggered by a transfer of shares in a participating entity or a transfer of interest in the JV vehicle or both, and it entitles the participating entities to all or any of the following rights: the right to be notified of a third party’s offer to acquire interest, right to be furnished with the details of the third party and the proposed acquisition agreement, right of first refusal to purchase the participating interest, and the right to be offered a cash value equivalent to the terms and considerations negotiated with a third party.
Judicial decisions on pre-emptive provisions under a JV agreement enunciate the principle that a transfer of shares is not automatically construed as a transfer of interest in a JV. Recourse is always had to the wordings of the pre-emptive provisions in arriving at the interpretation to be given.
In Kawasaki (Australia) Pty Ltd v ARC Strang Pty Ltd [2008] FCA 461 FC Australia (NSW), a sale structure that transferred shares in the parent company (ARC Strang) rather than the interest in the JV vehicle itself (Prixcar) was held to not have triggered the pre-emptive clause. The latter required a participant desirous of transferring shares in the JV (Prixcar) to notify the other participant of the proposed agreement. Although this sale would affect the ownership and control of the JV vehicle, the court did not impute a desire to transfer shares in the JV Vehicle because the parties had adopted a structure that bypassed the pre-emption clauses. In Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd [2015] WASC 242, neither the triggering event nor the scope of the pre-emptive clause was in dispute. Rather, the dispute was that the purchase price conditions offered to the other participant (Santos) in the notice did not comply with “cash value” consideration under the JOA. Subsequently, the Court held this notice to be invalid and required to be re-served. Reiterating the above, a Court might approve a sale structure adopted to bypass a preemptive provision as well as strictly or narrowly construe such provisions.
The inclusion of preemptive provisions remains a means by which Shareholders maintain their interests in the participating entities and are afforded priority rights in the event of a proposed transfer or acquisition of shares of the participating entity. While its operations may pose a hurdle in a proposed transaction with a third party, and may sometimes give rise to a suit with regards to enforcing the right of first refusal, disagreement over the cash value equivalent, and the triggering events; the law will always recognize the preemptive agreement of parties as to its full effect guided by the clear intentions as expressed in the Preemptive clause.