Richie Clark, partner at Fox Williams LLP, talks today about how to prepare a Ukrainian oil & gas exploration and production company for material external third party investment, whether by way of joint venture or equity participation.

Before a third party can assess the desirability of making an investment and if so, the structure that investment should take, it will need to do due diligence on Target’s business and assets.

To run an efficient process, particularly where it may be anticipated that there will be a number of potential investors in competition, it would be advisable for Target to prepare itself well in advance for the due diligence exercise.

The key aspects of this process are set out below.

Target Point Person(s) 
Identify who will be the point person or persons within Target who will be responsible for coordinating the accumulation of the relevant information for due diligence.  There may also be some sensitivities internally with employees about the process and the best way to keep things confidential is to have only a small circle involved in the process until negotiations are well advanced.

Appointing advisers
Target should ensure it has appropriate legal advisers on board to advise on the type of information to provide for due diligence, how to protect the confidentiality of that information, market practice on the process, assisting with the investor memorandum if required as well as any eventual negotiation of the transaction.  Target may also choose to have a financial adviser appointed if it wanted to run the process as an auction, or to advise the Target board on fair valuation and/or accountants appointed to prepare an accountant’s report.

Confidentiality Agreement
Before any information is disclosed to potential investors/partners and their advisers, a suitable confidentiality/non-disclosure agreement should be entered into.

Competent Person’s Report (“CPR”)   
Fundamental to any decision to invest by a partner will be the CPR – a  report by a suitably qualified and reputable geological firm providing its conclusions on existence and value of the oil & gas reserves of Target.  The CPR should be up to date and prepared using a standard acceptable under one of the following internationally recognised codes/organisations: the Society of Petroleum Engineers or Canadian NI 51-101.

Accountant’s Report
It may be helpful to minimise the time lapse that would be involved if each of potential investor/partner were to carry out its own full financial and other investigations from scratch.   Although not obligatory,  it may be desirable to arrange for an accountant's report (which is intended to be a "warts and all" document) to be prepared by Target, which would then be addressed to the successful bidder, albeit subject to qualifications as to reliance and limitations on their liability in respect of their report.   Whether this is required will depend very much on the circumstances depending on the circumstances and the image that Target wants to project.

Title Opinions
Using the same rationale as the Accountant’s Report, it may be desirable for Target’s local lawyers to prepare opinions on the validity and enforceability of the relevant licences and key contracts governing the rights to oil & gas assets.   Such opinions can also provide an overview of the regulatory regime in Ukraine for licensing and the production and sale of oil & gas

Investment Memorandum
It would be helpful to put all of the information into context for potential investors/partners for Target to produce an investment memorandum, or at least a presentation/teaser which sets out an overview of the business, assets, key terms of the exploration and production licences, key financial information, management and shareholding structure.  This document could also set out what type of transaction would be preferred by Target ie straight equity investment, joint venture, operating know-how etc.

Due Diligence
As an oil & gas company operating in Ukraine, the key aspects of due diligence that a prospective investor/partner will expect to see to enable it to conduct its financial, commercial and legal review are broadly the following:

Financial

Historical accounting information.
Capital expenditure since the last accounts.
Share capital and borrowings, distinguishing between intra-group debt and bank borrowings.
Copies of underlying loan and security documents and guarantees.
 Any business plan or projections for the current year.

Taxation

Status of tax returns and details of tax position including losses (if applicable).

Constitution

The corporate charter
Details of directors and other officers.

Assets

 Details of principal assets, well equipment etc.

Material Contracts

Details of relevant contracts related to the business and assets such as operating, farm-in, pooling, production sharing, trading, pipeline and export agreements
Joint venture agreements, licences and other material contracts

Licences

 Details of the licences and permits which give title to oil & gas assets and/or are required for Target's business, ie in addition to the principal exploration and production licences, also any environmental, surface access, storage or export permits, etc.

Employment

Service contracts with directors and key employees.
Standard terms and conditions of employment for other categories of staff.
Details of pension schemes and other employee benefits such as profit-sharing schemes.
Analysis of workforce, by age and length of service.

Property

Details of offices and other real property owned or lease (excluding the licenced areas for exploration and production provided above).

Intellectual property

Details of any licences of intellectual property rights, eg with respect to well logs, seismic data etc.
Details of computer systems and software used.

Insurance

Copies of insurance policies and information on claims.

Disputes

 Details of liabilities, including litigation or arbitration proceedings, and other disputes or investigations (including environmental disputes and investigations) affecting Target.

Data Room

The above information will typically be assembled in a “data room”, organized generally in line with the above headings in response to questions set out in typical due diligence questionnaire.  

The data room is a physical location where all the documentation are kept in folders for inspection.  More typically, as prospective investor/partners and their advisers will likely be in various locations outside Ukraine, a secure electronic data room can be set up where relevant documents are uploaded for inspection online.   The electronic data room can only be accessed with passwords given to those parties which have signed the confidentiality agreement.  

Any further documents/answers provided in response to any further due diligence queries will be added to the data room, as the contents of the data room will be referred to in the warranties which may be given by Target to the prospective investor/partner as part of the contractual documentation which will govern the eventual transaction between the parties.

Richie Clark is a corporate partner and head of capital markets at London law firm Fox Williams LLP, where he focuses on public takeovers,  pre-IPO finance, London listings and placings, secondary fundraisings, activist shareholder and corporate governance issues, with a sector focus on natural resources.   Mr Clark previously acted for Cardinal Resources plc on its London-listing, financings and sale of its Ukrainian oil & gas assets to the Kuwait Energy Company.   He can be contacted on +44 (0) 20 7614-2507 or rclark@foxwilliams.com