Opportunity - Issue 94

ENERGY
MATERIAL BREACH OF REPRESENTATIONS AND WARRANTIES
Representation and warranties generally do not include
any kind of comfort concerning oil and gas prices,
availability of reserves, production levels or political
issues. However, current circumstances might give rise
to breaches such as:
• breach of a warranty to ensure that there is no
event of default under any of the existing financing
arrangements: low oil prices and/or a suspension of
production may trigger events of default relating to
financial covenants;
• breach of material project contracts (for nonperformance,
non-payment); and
• the target is unable to pay debts as they fall due.
PRICE ADJUSTMENT
For many deals, the price for the asset/company is fixed
on a past date (a locked box date or retroactive effective
date). In this case, there is a risk of value fluctuations
____ __ ___ __ _ _
As African countries are
feeling economically
more fragile, some
will become more
protectionist in terms
of foreign investments
___ __ ___ __ _ _ _
between that date and the date of the actual closing
of the deal. This can be significant where oil and gas
prices or production have significantly decreased since
that date. The parties may still have to close at the
original price in these circumstances.
If on the other hand the price is calculated based on
the value at the closing date, then the parties may be
better protected against any sudden increase or decrease
in oil and gas prices or production levels. Deferred price
mechanisms based on future performance might also
be helpful. Parties may become being more creative
with pricing mechanisms in future deals, with both
parties looking to mitigate their risks.
FOREIGN CURRENCY
Some countries have found themselves
short of foreign currency, particularly those
countries that are dependent on exports of
goods (Ethiopia is an example) or oil and gas
revenues (such as Nigeria and Angola). This
means that African buyers have struggled
to be able to obtain the foreign currency
necessary to do deals. It has also meant that
foreign investors are concerned about their
investments becoming cash trapped in a
country. These issues have arisen on top
of the already existing issues around the
tightening of regulations in certain regions
(like the CEMAC region) concerning the
ability to maintain offshore bank accounts.
PARTNER RISK
Many foreign investments in Africa are through
joint ventures with local partners and/or with other
international investors either for legal reasons or for
business reasons, or a combination of both. Many foreign
companies are also dependent on local contractors
and suppliers.
Covid-19, combined with the oil and gas crisis, has not
only made target companies and projects more fragile
but has also made certain investors and contractors,
particularly smaller investors and contractors, more
fragile. In a company or project where the financial
stability of each of the stakeholders is important (for
example, an entity requiring shareholder funding
or dependent on shareholder services), this can be
a real issue. Foreign investors are therefore being
increasingly diligent both with new investments and
in relation to existing investments.
These circumstances may provide opportunities for
larger investors to acquire bigger stakes in companies
and projects. However, it may also require them to
acquire additional stakes to protect their investments
from the financial difficulties of their partners rather
than because they wanted a larger stake.
Where local partners or contractors have financial
difficulties, international investors may prefer to
support them financially rather than buy them out,
because it makes legal or business sense to do so.
___ __
Rebecca Major,
Partner, Herbert
Smith Freehills LLP
Herbert Smith
Freehills is one of the
world’s leading global
law firms, with
27 offices globally.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ISSUES
Before Covid-19 and the oil price collapse, ESG was the
key point in the minds of most oil and gas companies
and should not be forgotten. Sellers looking for a
clean exit, or buyers looking to avoid having to take
on past issues, should negotiate pre- and post-closing
indemnities carefully on this basis.
NATIONAL SENTIMENT
As African countries are feeling economically more
fragile, some will become more protectionist in terms
of foreign investments (increasing tax rates, etc).
However, this is not universally the case and many
countries have realised that they need the support of
others either regionally or internationally.
• To hear more from
Herbert Smith
Freehills about
negotiating African
M&A deals, attend
the Finance Forum
at AOW 2020.
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