DealLawyers.com Blog

Preemption rights — provisions in cooperative agreements that give one party the option to buy the other’s interest before it can be sold to a third party — often give rise to disputes. This Debevoise alert cites Chevron’s acquisition of Hess as an example of a parent-level transaction delayed by over a year because of a dispute regarding preemption rights contained in the joint operating agreement of a significant asset. Given the risk of unintended consequences, the alert provides practical tips for drafting preemption rights that work as intended — including to prevent them from “interfering with large-scale transactions, parent-level M&A or IPOs.” The first tip is an existential one:

Weigh the costs and benefits of including a preemption right in the first place. Parties should bear in mind that preemption right provisions are reciprocal and have inherent costs to all parties involved. In particular, because preemption rights can restrict the transfer or sale of a given asset, they can impact not only its marketability but that of the associated businesses. At the same time, preemption rights have discrete benefits, most notably in affording joint venture partners some control over their collaboration partners.

When included, it recommends that the provision be very clear about:

– when the preemption right is triggered, including precise definitions of “transfer” and “change in control”;

– the types of transactions, if any, that are carved out from its scope;

– what happens if the preemption right is triggered, including how the stake would be valued, the timeline for exercising the right and other procedural steps; and

– a clear and efficient dispute resolution mechanism in case there is a disagreement.

It also says you need to anticipate the impact on certain transactions, especially ones at the parent level:

An asset-level preemption clause can complicate larger deals up the chain of ownership if it is not properly limited. For example, parties may wish to exempt transactions where the asset in question represents only a small percentage of the value of the overall transaction. Parties might also consider bespoke carve-outs that contemplate a specific future transaction. For example, parties sometimes choose to carve out IPOs or ultimate parent level transactions from the preemption right, so that a company can go public or undertake a corporate merger without triggering preemption rights across its portfolio of agreements at the asset level.

– Meredith Ervine