Along with growth in global demand for natural gas, there has been a corresponding increase in the number and value of LNG project investments worldwide. Such investments may take various forms, depending on, amongst other things, the development stage at which an investment is made, and the structure adopted for an LNG project. In this respect, certain LNG projects may involve incorporation of a separate project company ("LNG Company") to own the liquefaction facilities, whereby such company may either sell LNG after purchasing and processing gas supplied by the upstream participants or else process gas for the upstream participants in return for a tolling fee. As a broad overview, this article considers issues arising from an investment in an LNG Company.
Sale and Purchase Terms
As in any sale and purchase agreement for the shares ("SPA"), a key concern of the parties relates to the amount and payment of the purchase price. Assuming that the LNG Company is set up as a profit earning entity, the valuation of the shares will require careful consideration of the profits earned by the LNG Company through either the tolling fee or the LNG sales price. Such profit element may not be a key consideration, however, if the LNG Company is charging a not for profit toll and the investor is concurrently acquiring an upstream interest. Separately, the parties will need to agree on an appropriate method to settle payment of the purchase price, for instance, whether the purchase price should be based on a "completion accounts" basis (i.e., where the price is paid at the completion date but subject to adjustment once finalised accounts are prepared to reflect the company's financial state at such completion date). Furthermore, the investor may desire that a portion of the purchase price be held in an escrow account for a period following completion to serve as available funds to satisfy claims for indemnities for breach which may subsequently arise.
Under the SPA, the parties will need to consider the scope of the overall representations and warranties furnished by the seller such as those relating to the validity of title to shares, compliance with anti-corruption legislation and policies (both at the seller and LNG Company level) effectiveness of key project agreements (e.g., tolling agreement), government approvals for operation of the LNG plant, and environmental compliance. In particular, the investor would want to ensure, whether through due diligence and/or warranties, that the seller is permitted to sell its shares (e.g., a shareholders' agreement may provide that shareholders are not permitted to divest shares until a certain period after project completion), and that any prior contractual rights relating to the shares (e.g., rights of first refusal) have been complied with or waived. If the investor will not acquire any upstream interest but the seller is also an upstream interest holder, one issue which could arise is whether (and the extent to which) such seller should be required to make warranties as to matters relating to the upstream concession and interests.
The SPA will also address the conditions precedent to completion by providing, for instance, that completion is dependent on the receipt of applicable government approvals (including approvals from governmental agencies responsible for the competition and petroleum sectors). Furthermore, if the midstream acquisition is to proceed concurrently with the acquisition of upstream interests, the SPA may include the completion of the upstream acquisition as a condition precedent to completion under the SPA.
Shareholders' Agreement
For the potential investor, it is critical to understand the rights and liabilities that are attached to the shares under the shareholders' agreement ("SHA") and other constitutional documents of the LNG Company. First of all, the investor will want to ensure that it has the ability under such documents to appoint directors and also new management personnel, in a manner and extent that corresponds to its newly acquired shareholding interest. Furthermore, the investor will need to review carefully the applicable voting thresholds and provisions at both the board and shareholder levels. In particular, if the investor will be a minority shareholder, the investor will prefer to see that important decisions (e.g., additional financing or facility expansions) are treated as reserved matters requiring a supermajority board and/or shareholder approval (preferably at a level that requires its concurrence). Additionally, the investor will also want to confirm the extent of its cash call obligations under the existing work programs and budgets, and the LNG Company's dividend and distribution policy.
Assuming that the investor will not be acquiring an upstream interest while some or all of the other shareholders will hold upstream interests, the investor may also be concerned about possible conflicts of interests. In particular, such investor would want to ensure that the other shareholders do not divert commercial value away from the LNG Company to the upstream participants. Accordingly, the investor may wish to negotiate for provisions in the SHA that provide that shareholders who are also upstream participants abstain from voting on certain matters involving agreements with the upstream participants.
Generally, amendments to the SHA (to the extent the investor has the bargaining power to negotiate for them) should be agreed and become effective once completion occurs under the SPA. The amendments to the SHA may be agreed (subject to completion) at the signing of the SPA, or else the SPA could require that the existing shareholders deliver a signed copy of the relevant amendments as a condition precedent to completion. In any case, such negotiation may not be a straightforward exercise as it will involve dealing with separate shareholders with possibly differing interests and objectives.
Other matters – Project agreements and financing
Other issues to be considered by the parties to the SPA would include: (a) whether the terms of the related project agreements (e.g., tolling agreements or LNG sales agreement) to which the LNG Company is a party are satisfactory from the investor's perspective; (b) the effect of the share acquisition on such related agreements, for instance, whether the protections under the host government agreement would be adversely affected; and (c) if lenders are providing financing for the share acquisition, their requirements for security, and how the priority ranking of securities will be addressed with the existing lenders of the LNG Company.
As seen from this brief discussion, an investment in a midstream LNG project company might involve consideration of a variety of issues and related project agreements, as well as negotiations with different entities. Each investment will raise its own set of different issues that would need to be appropriately addressed during the acquisition process by a full understanding of the overall project structure and LNG value chain.
