Inspectioneering
Inspectioneering Journal

Managing Asset Transfers: Negotiating the Deal and Minimizing Risk

Part 2

By Brandon M. Watson, Esq. at GableGotwals. This article appears in the March/April 2014 issue of Inspectioneering Journal
This article is part 2 of a 2-part series.
Part 1Part 2

Introduction

In the January/February issue of Inspectioneering Journal, we discussed techniques routinely employed by Sellers to minimize certain risks associated with the sale of complex oil and gas assets. This follow-up article compliments the one published in the last issue by focusing on the techniques routinely employed by Buyers in the purchase of complex oil and gas assets, paying special attention to three sections found in most asset purchase agreements: (a) the Representations and Warranties, (b) the Covenants, and (c) the Indemnifications.

Representations and Warranties

How it Works: As mentioned in the last issue, asset purchase agreements typically contain exhaustive representations and warranties made by the Seller to the Buyer regarding the Seller’s authority to sell the assets, the condition of the assets, and any consents or approvals necessary to operate the assets. While the Buyer often also makes representations and warranties, those are usually routine and focused on the power and authority of the Buyer to enter into (and close) the transaction. For the Buyer, the Seller’s representations and warranties serve two important roles: (i) they allow the Buyer to learn more about the subject assets and "smoke out" any possible concerns and (ii) they allow the Buyer to receive contractual protection that the assets are in-fact what the Buyer anticipated when the letter of intent was first signed. 

How the Buyer Reduces Risk: The Buyer can reduce risk associated with the representations and warranties by "pushing back" on the various qualifiers used by the Seller (we mentioned in the last issue the use of materiality qualifiers, knowledge qualifiers and scheduling exceptions). If these qualifiers are agreed to by the Buyer, the Buyer will often permit their usage in only limited circumstances. In addition, with regard to knowledge qualifiers, the Buyer will try to cast a broad net around those representatives of the Seller who are deemed to have "knowledge"—not just relying on key executive officers.
 

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