Face Challenges Confidently

166 Trenolone v. Cook Exploration Company

Thursday, September 3rd, 2015

Richard F. Brown

Fasken Land and Minerals, Ltd. v. Occidental Permian Ltd.,          S.W.3d                                                                                                                        , 2005 WL 1539260 (Tex. App.—El Paso 2005, pet. denied), addresses disputes involving a preferential right to purchase provision and a removal of operator provision. Occidental or its affiliates (“OXY”) were the operator and seller of a 75% interest in the MFU Unit in which Fasken and others (“Fasken”) owned the minority interest. The OXY sale was a package sale of assets valued at approximately $3,550,000,000, and the parties allocated $63,000,000 as the purchase price of OXY’s interest in the MFU Unit. Fasken disputed the adequacy of the notice given by OXY in connection with the preferential right and contended that OXY had been removed as operator by a vote of the minority owners. The court held that the notice was adequate and that, while OXY had been voted out as operator, no successor had been elected, so OXY continued as operator.
The preferential right clause provided that the seller was required to give a written notice “with full information concerning its proposed sale, assignment, transfer of ownership or transfer of control of ownership; or other disposition, which notice shall include . . . .”  This  was followed by an enumeration of four specific categories of information. One category required disclosure of “the purchase price or in the event of the transfer of a . . . group of properties, an allocation of that portion of the purchase price attributable to its interest in the oil and gas estate under this Agreement or in the Unit Area . . . .” Although there was a protracted dispute over the allocation of the purchase price as affecting the validity of the notice, the court held that the contractual preferential right did not require that the basis of the allocation be in the written notice.  There were other objections raised by Fasken as to the adequacy of the notice, but the and to provide Fasken entities an opportunity to exercise its preferential right to purchase . . . even if there were technical deficiencies that rendered that notice less than perfect.”
The operating agreement for the MFU Unit provided that the operator OXY could be removed by a vote of 85% of the voting interest remaining after excluding the voting interest of the operator. It was undisputed that Fasken and the other minority owners voted OXY out as operator. However, the operating agreement also provided the election of the successor operator required that the successor be selected by “the affirmative vote of three (3) or more Working Interest Owners having at least eighty-five percent (85%) of the combined voting interest of all Working Interest Owners, provided no Unit Operator who is removed may vote to succeed itself.” OXY simply voted “no” to the proposed successor operator and continued to operate. The agreement also provided that “[a] Unit Operator who . . . is removed shall not be released from its obligations hereunder for a period of three (3) months after its . . . discharge unless a successor Unit Operator shall have taken over the operations hereunder prior to the expiration of said period.” The court could have read this provision to mean the operator who is removed is released in three months, or sooner if a successor is selected. However, this court held that nothing in the operating agreement prohibited OXY from voting “no” in elections to select a successor operator, and because no successor had been selected, OXY continued.
The case is significant as to preferential rights because it appears to continue a judicial trend toward requiring only “reasonable” notice to trigger a preferential right and leaving details about valuations to be sorted out later. That is, the holder of the right runs a risk of losing it, if the holder is too coy about exercising that right. As to the removal of the operator, the form operating agreements most commonly in use do not always work as anticipated.  A requirement will be enforced as written.