Erin Dyer, Sharon Wilson

The underlying principle of a pre-emption right is that a joint-venture

participant should have the right to buy the upstream asset from the seller on the
same terms and conditions agreed with a prospective buyer. While pre-emption right
provisions vary from case to case, a common form is contained in the AIPN standard
form of joint operating agreement, which provides that once the final terms and
conditions of an upstream asset transfer have been fully negotiated, the seller must
offer those terms and conditions to the other joint-venture participants. Each of the
other participants has the right to accept the offer to buy the upstream asset on the
terms and conditions presented by the seller and in proportion to its existing interest
in the upstream asset. If none of the other participants exercises its right to the offer,
then the seller may transfer the upstream asset to the proposed buyer on terms no
more favourable than those presented to the other participants. In practice, where a
pre-emption right exists, it will mean a delay to the sale process of usually 30 to 60
days (or the duration of the pre-emption period) while the joint-venture participants
decide whether or not to exercise their pre-emption right.
The buyer should also note that the joint-venture participants may also have the
right for their participating interest to tag along with the sellers transaction that
is, to require the buyer, as a condition of buying the sellers interest, also to buy their
participating interest on the same terms.
There may be ways in which a transaction can be legitimately structured so as to
avoid triggering a pre-emption right. Where the pre-emption right entitles the jointventure participants to match the deal done with the buyer, one argument
commonly advanced is that if the transaction can be structured in such a way that
the joint-venture participants cannot physically match it, then the pre-emption right
may be defeated. The buyer may seek to achieve this position by offering non-cash
consideration which the other joint-venture participants do not have (ie, an interest
in another field, equity, or loan notes) and therefore cannot match, or by structuring
the transaction as an indivisible package deal involving a package of interests which,
under the terms of the sale and purchase agreement, cannot be split.
Another method to avoid triggering a pre-emption right is for the buyer to
acquire the shares of the seller (provided that the joint operating agreement does not
contain change-of-control provisions). Alternatively, where the sale of the particular
company holding the upstream asset is not attractive to the parties, the seller may
transfer the upstream asset to an affiliated company of the seller (usually newly
formed), as this can normally be done without the consent of the other joint venture
participants. The buyer will then purchase the share capital of the newly formed
affiliated company (the process being known as the hive-up or affiliate route). For
a hive-up route to be effective, the seller must transfer the upstream asset to its
affiliated company while it remains an affiliate of the seller and before any steps are
taken which may result in beneficial ownership vesting in the buyer. Caution should
be exercised in employing this disposal method, as joint operating agreements often
have provisions designed to prevent such a transaction by restricting the affiliated
company from transferring the upstream asset to a third party within a specific time
period.
The effect and implications of pre-emption provisions will be entirely dependent

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