Face Challenges Confidently

184 Navasota Res., L.P. v. First Source Tex.

Wednesday, September 2nd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Navasota Resources, L.P. v. First Source Texas, Inc., 249 S.W. 3d 526 (Tex. App.–Waco 2008, pet. filed), construes the preferential right to purchase provision in the 1989 M.F.O.A. as applied to a package sale. The holder (“Holder”) of the preferential right (“Right”) sued the working interest owners and the purchasers of a portion of the working interest (“Owners”) to enforce the Right. The Right in this case was found in a standard A.A.P.L. 1989 M.F.O.A. joint operating agreement (“JOA”) covering a Contract Area referred to as the “Hilltop Prospect.” The JOA contained the following form provision:
Should any party desire to sell all or any part of its interest under this agreement, or its rights and interests in the Contract Area, it shall promptly give written notice to the other parties, with full information concerning its proposed disposition, which shall include the name and address of the prospective transferee (who must be ready, willing, and able to purchase), the purchase price, a legal description sufficient to identify the property, and all other terms of the offer.  The other parties shall then have an optional prior right, for a period of ten (10) days after the notice is delivered, to purchase for the stated consideration on the same terms and conditions the interest which the other party proposes to sell. . . .
Under the terms of the proposed transaction between Gastar and Chesapeake, Chesapeake would (1) purchase a percentage of Gastar’s outstanding shares of common stock, (2) enter into a thirteen-county area of mutual interest with Gastar (“AMI”), (3) pay $5,012,933.00 for 1/3 of Gastar’s net leasehold acreage that was subject to the JOA, and (4) pay 44% of the costs through casing point on certain test wells in order to earn a 33.33% working interest. On October 18, 2005, the Owners sent the Holder a letter informing them of the Chesapeake deal and giving the Holder the opportunity to exercise its preferential right to purchase by (1) paying $5,012,933.00 for 1/3 of Gastar’s net leasehold acreage that was subject to the JOA, and (2) paying 44% of the costs through casing point on certain test wells in order to earn a 33.33% working interest. On October 21, the Holder notified the Owners of its intent to exercise its preferential right. Later the same day, the Owners sent a second letter to the Holder that stated the October 18 letter was erroneous; therefore, the Owners were rescinding the original notice letter. A second notice letter was sent to the Holder two days later and it stated that in order for the Holder to exercise its preferential right to purchase, it must comply with every aspect of the agreement, i.e. the stock purchase, the thirteen-county AMI, the cash price, and the promoted carry. The Holder refused to accept the “modified” offer and brought suit.
The court first considered the fundamental question of whether a preferential right to purchase can be triggered by a package sale. The transaction clearly involved properties outside the working interest of the JOA. According to the majority rule, a third party’s offer to purchase property as part of a package sale subject to a preferential right provision involving multiple properties or a larger tract of land does not invoke the preferential right provision. Texas courts, on the other hand, have almost uniformly followed the line of cases which holds that a preferential right is invoked by a package sale. In this case, the court followed the minority rule and held that the first proposal invoked the Right because the proposal included the sale of the Owners’ working interest in acreage that was subject to the JOA.
Given that the Right was invoked, the court then had to determine whether the Holder was required to purchase shares of common stock and/or enter into the thirteen-county AMI to exercise its Right. The Right in the JOA stated that a party who desires to exercise the Right must agree to purchase the interest being sold “on the same terms and conditions” as the third party who agreed to purchase the interest. The Owners argued that the AMI and stock purchase were additional terms and conditions for the purchase of the Hilltop Prospect, while the Holder argued these items were separate transactions included within the deal. The court found that “virtually every authority of which we are aware agrees that the holder of a preferential right cannot be compelled to purchase assets beyond those included within the scope of the agreement subject to the preferential right in order to exercise that right.” The court held that the Owners could not require the Holder to purchase shares of common stock or enter into a thirteen-county AMI in order to exercise its Right.
The Owners contended that the value of the prospect was substantially higher than reflected in the notification letter sent to the Holder or the letter of intent between the Owners and the Holder, but the higher value was ultimately accounted for in the deal through the stock purchase and AMI. Texas follows the rule that the seller should be held to the allocated price absent affirmative evidence of bad faith or of some other improper basis for the allocated price. The Right in this case does not require the Holder to pay “true value” or fair market value. The provision only requires that the Holder match the third-party offer, thus the Holder was entitled to specific performance.
The significant aspects of the case are the holdings that a package sale does trigger a preferential right to purchase, that the Holder cannot be required to purchase some asset other than the property subject to the Right, and that the allocated price will apply in the absence of bad faith or of some other improper basis for the allocated price.