Hugh TuckerSeptember 29, 2005
OWNERSHIP ARRANGEMENTS
FOR
INTERNATIONAL PROJECTS
Types of Projects
Upstream Exploration and Development
Midstream Pipelines
Downstream LNG GTL Refineries Petrochemicals Power
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
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
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
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
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
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
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
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
Governance Issues - Allocation of Authority
Shareholders/Members
Directors
Officers
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
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
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)
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
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