Transcript
Page 1: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Hugh TuckerSeptember 29, 2005

OWNERSHIP ARRANGEMENTS

FOR

INTERNATIONAL PROJECTS

Page 2: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Types of Projects

Upstream Exploration and Development

Midstream Pipelines

Downstream LNG GTL Refineries Petrochemicals Power

Page 3: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Choice of Entity (Type and Jurisdiction)

Tax considerations in choice of entity Applicable tax rate, available deductions, etc. in project

location for each type of entity Taxes assessed by jurisdiction of organization, if different

from project location Availability of tax treaties to reduce tax rates and insure

creditability in home country Flow-through v. deferral treatment Taxation of share/interest transfers

Page 4: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Choice of Entity (Type and Jurisdiction) (continued)

Companies law considerations in choice of entity Certainty and clarity of corporate law Available governance structures - manager v. board v.

members Minimum capitalization and ability to use shareholder loans to

fund Allowable numbers of shareholders/members Availability of different classes of shares or interests with

different rights Liability of shareholders/members Right to transfer or pledge shares/interests Ability to issue shares or bonds in the public markets to raise

funds Local shareholder and local director requirements

Page 5: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Choice of Entity (Type and Jurisdiction) (continued)

Host government requirements regarding choice of entity Local company may be required Some forms of business organization may not be available to

investors General investment considerations in choice of entity

Political risk of using an entity subject to the laws of a particular jurisdiction

Attractiveness of form of entity to other potential investors and lenders

Availability of foreign investment incentives for that type of entity Applicability of employee profit sharing, public financial

disclosure, and other specific non-tax requirements Availability of bilateral investment treaties

Page 6: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Choice of Entity (Type and Jurisdiction) (continued)

Limited Liability Companies Liability of all members limited to contributions Single layer of tax Flexibility of capital structure Single member benefits - disregarded entity for federal tax

purposes Generally fewer formalities than corporations Case law limited but growing Traditionally (and currently) franchise tax issue for Texas LLC's

versus limited partnerships; but, likely (?) to change No entity (unincorporated joint venture) is a possibility

Page 7: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Ownership Structure

Ownership v. operation Separate operating company owned by the same investors may

protect ownership company from liabilities, restrict employee profit sharing, provide an outlet for secondment from the host government, etc.

Operating company could be owned by fewer than all investors, to allow one or several of them to control day to day operations

Payments between owning and operating companies may be subject to taxation

Multiple Phases Phases -- Separate exploration or development blocks,

separate LNG Trains, separate plant facilities or units Can use a completely separate company with potentially

different ownership for each phase

Page 8: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Ownership Structure (continued)

Multiple Phases (continued) Alternatively, each phase can be a separate subsidiary of the same

holding company with tracking stock used to provide rights in different phases to different holding company investors

A holding company with a single class of stock giving each investor the same indirect interest in each phase could be established, but this is unusual in phased projects

Generally do not see one company owning multiple phases - use of separate companies or subsidiaries allows separate taxation of each phase, keeps the other liabilities of the phases separate and allows for separate equity ownership and separate financing of each phase

Common infrastructure used by several phases Prefer not to allow one phase (or its lenders) to control common

infrastructure Common infrastructure can be in a separate subsidiary, in a holding

company, or owned in undivided shares

Page 9: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Alternative Ownership Structures

Investor 1 Investor 2 Investor 1 Investor 2 Investor 3

Phase 1 Co. Phase 2 Co.

Investor 1 Investor 2 Investor 3

Holding Company(governed by Class A)

Phase 1 Co.(governed by Class B)

Phase 2 Co.(governed by Class C)

InfrastructureSharing

Agreement

45% Class A50% Class B40% Class C

45% Class A50% Class B40% Class C

10% Class A20% Class C

100%100%

50% 50% 40% 40% 20%

InfrastructureSharing

Agreement

Separate Companies

Holding Company with Tracking Stock

Page 10: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Alternative Ownership Structures (continued)

Investor 1 Investor 2 Investor 3

Holding Company

Phase 1 Co. Phase 2 Co.

45% 45% 10%

100%100%

Investor 1 Investor 2 Investor 3

Phase 1 Phase 2

50% 40% 20%50% 40%

Operating Agreement Operating Agreement

Holding Company without Tracking Stock

Unincorporated Joint Venture

Infrastructure Sharing Agreement

InfrastructureSharing

Agreement

Page 11: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Governance Issues - Allocation of Authority

Shareholders/Members

Directors

Officers

Page 12: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Governance Issues - Approval Thresholds

Unanimous - might include: Approval/amendment/termination of host government

contract Amendment of corporate organizational documents Change in form or jurisdiction of organization Merger, dissolution, sale of substantially all assets Filing for bankruptcy Issuance of shares on a non-pro rata basis Entry into new lines of business Capital contributions beyond an agreed limit Execution of affiliate contracts

Page 13: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Governance Issues - Approval Thresholds (continued)

Supermajority - might include: Appointment/removal of officers Development budget Individual expenditures over an agreed amount Approval/amendment/termination of key project documents Approval of a proposed financing Establishment of reserve levels Institution or settlement of major litigation

Page 14: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Simple majority - might include: Annual budgets Approval/amendment/termination of agreements over a lesser

threshold level Individual expenditures over a lesser threshold level

Final investment decision should not require a unanimous vote - if a majority interest wants to proceed with the project, the minority should not be able to block them

Many of the same considerations apply in an unincorporated joint venture

Governance Issues - Approval Thresholds (continued)

Page 15: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Governance Issues - Management

Appointment and removal of officers By board By individual shareholders (secondment)

Apparent authority of directors and officers Ability of officers to subdelegate through powers of

attorney or otherwise Adoption of code of conduct/ethics restrictions and

corporate internal controls

Page 16: Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

www.bakerbotts.com

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