Preemptive rights, in essence, is a right of first refusal. It ensures that existing shareholders are given the option to purchase additional shares in the company or asset before they are made available to third parties. The proposed deal by Seplat Energy Plc (Seplat) and ExxonMobil, and conversations on NNPC’s preemptive rights arising from its Joint Operating Agreement (JOA) with ExxonMobil subsidiary, Mobil Producing Nigeria Unlimited (MPNU), has highlighted issues on the nature of pre-emption rights; particularly, to what extent they should limit the rights of parties to transfer their shares or ownership of assets.
The fundamental objective of pre-emptive provisions is to protect the interest of existing parties and prevent dilution of the control and value of assets. Furthermore, as the transfer of interests also entails the transfer of existing responsibilities in the JOA, existing parties to the JOA must be assured of the fact that the incoming third party is reliable, cooperative and has the financial resources and technical expertise to carry out its responsibilities under the Agreement.
Seplat Energy Plc, using its subsidiary, Seplat Energy Offshore Limited (SEOL), entered into a Sale and Purchase Agreement with ExxonMobil to buy its entire offshore shallow water business in Nigeria for $1.2billion. Thus, via this agreement, [x] will acquire the entire share capital of MPNU from ExxonMobil bringing these national assets collectively owned by Exxon Mobil and the NNPC, into full Nigerian ownership.
The transaction has been adjudged to be one that will create one of the largest independent energy companies on both the Nigerian and London Stock Exchanges and strengthen Seplat’s growth and profit capacity. As a first-of-its-kind deal, since the coming into effect of the Petroleum Industry Act 2021, the deal is expected to drive growth, profitability and overall stakeholder prosperity, delivering a 186 percent increase in production from 51,00bpd to 146,000bpd. Additionally, it is expected to deliver a 14 percent increase in 2P gas reserves from 1,501 Bscf to 1,712 Bscf and has a significant undeveloped gas potential of 2,910 Bscf.
Although the announcement was made on the 25th of February 2022, reports are that the negotiations on the deal have been on since 2018. However, while awaiting ‘ministerial consent and other required regulatory approvals’, the NNPC declared its interest to exercise its rights of pre-emption under a 1990 JOA between the company and MPNU.
The JOA in its Article 19.4 states that any party which intends to divest its ‘participating interests’ to a third party shall, in writing, give the other party prior right and option in writing to purchase the interests. The JOA also, provides that the right of pre-emption is exercisable by the other party within 30 days of receipt of the Pre-emption Notice.
Does NNPC’s preemptive rights in this transaction exist?
It has been of concern whether the right of pre-emption exists and if there were, whether NNPC was given a pre-emption notice. It is not uncommon for divesting parties to give notice to the other party in a JOA where it intends to divest its interest.
It is commendable for parties to be vigilant in controlling the entry and exit of parties into the ventures but a pre-emption regime that is excessively protective could be as bothersome as an inadequate one.
Where such rights exist, it will be a breach of corporate compliance not to give notice. The argument here is that as a state-owned corporation that over time had regulated and participated in the country’s oil business there will be no chance for them not to have had notice of such a deal. Also, although, NNPC is now a limited liability company under the new Petroleum Industry Act 2021, Section 53(2)-(5) provides that the government of the Federation still holds full ownership of NNPC Limited; its shares held by both the Ministry of Finance Incorporated and the Ministry of Petroleum Incorporated on behalf of the government of the Federation.
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It has also been argued that NNPC has no pre-emption rights in this transaction because the transaction is between Seplat and Exxon Mobil (the parent company) and not between Seplat and MPNU which owns the said assets. Exxon Mobil has, therefore, acted within its rights to dispose of its shares in MNPU.
On the other hand, arguments supporting the existence of pre-emption rights posit that it is of no consequence whether or not there is indeed a share sale or asset sale. The JOA evidencing the rights of the NNPC and MPNU provides in its Article 1.24 that the ‘participating interest’, of the Parties, is the “the undivided by percentage interest from time to time held by the Parties in the concession(s), the joint property and rights and obligations under this Agreement, namely: sixty per cent (60%), in the case of NNPC; and forty (40%), in the case of MPNUl.
There is no doubt that a JOA actually exists between the NNPC and MPNU, however, ExxonMobil as a holding or parent company of the subsidiary has the right to divest its shares or interest in its subsidiary to a third party. The effect of this is that the interests or rights which a subsidiary has in any contract will go to the third party to whom the interests have been divested. Therefore, there is no agreement between the said parent company and the NNPC which will make the right of pre-emption exist.
Also, there seems not to be a transfer of a participatory interest in the transaction between Seplat and Exxon Mobil. There is nothing to suggest that Exxon Mobil or MPNU is transferring certain participatory interests. What the deal sought to do is that with a transfer of ExxonMobil’s shares in MPNU, Seplat takes over the MPNU, and NNPC is in fact operating with MPNU which has been bought by Seplat.
Another argument is that supposing NNPC has such a right, it may not have the financial capacity to acquire such assets, and even if it did, the inadequacy in technical expertise and lack of accountability in the management of assets that has bedevilled the Corporation may be the bane to the effective utilization of these strategic assets. An attempt to get funds to acquire such assets may not only cause delay but may leave the third party disinterested in the whole deal.
Seplat, on the other hand, has proved to be a reliable indigenous oil company, with commendable technical expertise and resourcefulness in the oil industry. The company has demonstrated substantial mastery of financial and technical resource management. A co-ownership by Nigerian companies of such assets may not be a bad idea.
On the other hand, it is NNPC’s concern that International Oil Companies(IOCs) which intend to divest from Nigeria’s upstream sector must address issues of abandonment and decommissioning of oil assets.
Divestments must ”be done in a manner that brings value to Nigeria”. It may be as a result of ensuring that value is indeed brought that NNPC has made this move. Also, it may not matter who NNPC entered into the Agreement with, as long as there will be a transfer of interests, there exists a right of pre-emption with regards to the interests as it concerns the NNPC.
It has also been argued that it does not matter that the JOA was made between NNPC and a subsidiary of ExxonMobil. What matters is that where a third party buys, acquires or takes over the controlling shares of the subsidiary company of a parent company, the third party ultimately buys, acquires and takes over the right, power and interests of the subsidiary company.
Therefore, stipulations for corporate compliance (pre-emption rights) must be adhered to and regulatory approvals must be sought and obtained. This was the decision in the Federal High court’s case – Moni Pulo v Brass Exploration & 7 Ors (2012)
Preemption provisions – to have or not to have?
While pre-emption provisions offer both advantages and disadvantages, the latter seems to outweigh the former.
For one, the right of pre-emption prevents the indiscriminate disintegration of the beneficial interest in the license and the resultant effect of multiple interest holders being introduced becoming disruptive to voting arrangements and smooth operation of the joint venture. Also, in the event that none of the co-venturers have the financial and technical capacity to acquire and manage the transferred assets, there will be a negative impact on the investments and the general running of the projects. Looking at the Seplat and Exxon deal, and noting the interest which NNPC has, it is of great concern whether NNPC has the capacity to acquire and manage Exxon’s MPNU asset.
The National Petroleum Development Company, the NNPC’s exploration and production subsidiary currently struggles with the task of keeping oil blocs active and finds oil production difficult. The Nigerian Extractive Industries Transparency Initiative (NEITI) has described the NDPC as inefficient.
Report shows that NPDC has not paid the $3.925 billion owed being the outstanding amount for the 12 oil blocks that were transferred to it by the NNPC which accounts for NNPC’s 55 percent shares in certain joint ventures. It should be focused on properly managing assets in its possession, rather than buying more.
A right of first refusal guaranteed by pre-emption provisions impacts the commerciality of interests of the parties to a joint venture. Whilst the transferring party may offer the percentage of its interest at a profitable rate to the other parties after negotiations with the third party, the right to pre-emption restricts the commercial freedom of a party to sell its interest or part of it to a third party of its choice who intends to purchase such rights. They are often subject to disputes as co-venturers would expect that they are given the opportunity first to purchase. This may cause delays in such transactions as co-venturers may try to raise funds for such purchase if it is not readily available to them, making the whole process unattractive.
It is also common for the venturer who intends to divest interests to negotiate terms with a third party before offering the same to existing parties in the joint venture agreement by way of notice pursuant to any pre-emption provisions (a Notice).
This acts as a disincentive for third parties who want to buy, because they may invest significant time and costs to negotiate for a transfer that may never take place as an existing party to the joint venture may purchase the interests on the same terms. NNPC’s sudden interest in Exxon’s assets has brought about a whirl in the negotiations, and in the event that NNPC acquires the assets, the Seplat and Exxon negotiations would amount to a mug’s game.
The lengthy period usually stipulated by the agreement in which the right can be exercised as well as the consent required to be obtained in the pre-emption process may make the sale of interests difficult.
Another factor that acts as a deterrent is that even where the assets are indeed transferred to a third party, the prospect of a future dispute is not extinguished if the limitation periods for such contracts are over-generous or absent. It could be subsequently found out that pre-emption provisions were contravened after there has been a third-party transfer of interests. This leaves the third party’s title uncertain under the joint operating agreement. This makes the interest less liquid, less marketable, and consequently less valuable.
Pre-emption provisions also ensure that there is disclosure between parties to a JOA in the event of an intended divestment. There is the need to disclose the terms of the proposed divestment by the divesting party to the co-venturers in the Notice. Notwithstanding that the terms are often commercially sensitive, the divesting party must ensure that it discloses the terms of the sale, thus, this makes the other parties constantly involved in the transaction between the divesting party and the third party. This comes as an advantage to the existing parties to the JOA.
The divesting party involves the other parties in its transaction with the third party, which saves it the stress of investing time and resources into negotiations as the other existing parties may decide to exercise the right of pre-emption at the early stage, the existing parties are aware of the terms on which the negotiations are being made, and there is no issue of the presence of sharp practices. However, this is also a deterrent as commercially sensitive information are disclosed to the other parties of the JOA who ordinarily should not be part of the negotiations.
Recommendations for drafting preemptive provisions
Parties to joint venture agreements must appreciate the fact that, although pre-emption provisions are a standard feature of most of those types of contracts, they must be wary of the fact that these provisions may create disputes for them in the future which may affect the commercial value of their interests.
It will be of little profit to make the pre-emption provisions in their contracts restrictive, burdensome and obscure. Parties should expressly agree, during the JOA negotiations, on the types of transactions that would trigger the exercise of pre-emption rights. There should also be express agreement on how the pre-emption rights should be exercised and what capacity to be demonstrated by the existing parties when they intend to exercise their rights. Thus, provisions for certain standards that existing parties must meet before they can acquire the interests of the transferring party may be inputed.
For instance, they must demonstrate financial capacity to acquire and manage the assets to be transferred. A usual feature of pre-emption provisions is that the terms and conditions must be accepted unconditionally. Great care should be taken to ensure that the pre-emption provisions are clear and unequivocal in all respects and that such provisions properly reflect the intentions of the parties. This can help to ensure that there are no procedural irregularities and future disputes can be avoided. It is commendable for parties to be vigilant in controlling the entry and exit of parties into the ventures but a pre-emption regime that is excessively protective could be as bothersome as an inadequate one.
Valuation issues should be anticipated. Provisions for independent valuation mechanisms should also be addressed as disputes relating to valuation must be swiftly referred to experts for a binding determination. In the case, Moni Pulo v Brass Exploration & 7 ors (2012), negotiations between Parties to the joint venture for a transfer of the participating interests of the transferring party to the co-venturer broke down due to valuation issues, and a subsequent transfer to a third party which the co-venturer was not too comfortable with. NNPC’s concerns on decommissioning by IOCs may trigger issues of valuation of interests. Parties must be ready in such an event to prevent delays and a subsequent buy-off by a third party that does not seem suitable to the co-venturer.
Lengthy periods within which to exercise rights should be done away with. In the UK for instance, the UK government in relation to UK Continental Shelf, as of the 20th Licensing round, has prohibited pre-emption provisions in new JOAs. Additionally, pre-existing pre-emption provisions are now read in line with the New Pre-emption Arrangements which effectively require JV partners who are signatories to the Master Deed to exercise their pre-emption rights within 30 days of receiving a pre-emption Notice.
Where pre-emption provisions cannot be done away with, the time frame within which to exercise them should be reduced. This is to reduce delays in the interest divestment process. Hence, there is no issue of an unattractive and burdensome transfer process.
The benefits that pre-emption provisions offer appear to be its downsides. Parties can avoid including pre-emption provisions into their Agreements, and where such provisions must be included, parties must ensure that they are not baneful.
