Say you are about to buy, sell, or invest in an Alberta oil and gas company. You are conducting your due diligence, negotiating the transaction documents, pursuing any necessary approvals and are looking forward to closing. Before you can proceed, get ready to add another item to your closing checklist. The Alberta Energy Regulator (AER) has recently made some changes concerning oil and gas licences and approvals that you will need to consider.
In December 2017, the AER re-issued Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals. The revised directive tightens the eligibility requirements for individuals and companies to hold oil and gas licences and approvals in Alberta and gives the AER greater scrutiny regarding such licences and approvals.
These new requirements could delay, increase the cost of or halt oil and gas related M&A transactions. Parties should consider the following steps at an early stage of a transaction involving a target entity which is an AER licensee of oil and gas assets to see if Directive 067 could be a roadblock to a successful closing:
1. Do the extra due diligence to determine who is or will be in charge of the target entity
In addition to the standard suite of due diligence searches you may be conducting on the target entity, make sure that you are also doing your diligence on its current and/or proposed directors, officers and shareholders.
Consider checking the AER Compliance Dashboard to see if there are any outstanding compliance or debt issues involving any of the relevant parties and individuals involved in the transaction, as well as reviewing the "Section 106 Named Individuals" list on the AER's website which names individuals who have been in contravention of AER requirements and will likely be prevented from working as a director, officer, agent or person in control of company subject to AER regulation.
2. Does the transaction cause a material change to the target entity?
A material change includes, but is not limited to: (i) a change to legal status or corporate structure; (ii) an amalgamation, merger or acquisition; and (iii) changes to directors, officers or control persons, being persons that hold or control more than 20% of a licensee's outstanding voting securities.
An updated eligibility application form must be provided to the AER within 30 days of such material change, with the potential result that the AER revokes eligibility or imposes stricter terms on the licensee, if they feel such change creates an unreasonable risk.
If the transaction is likely to cause a material change to the target entity, the parties should request an advance ruling from the AER regarding whether the AER considers such change to be an unreasonable risk. Depending on the AER's ruling, the parties can then proceed accordingly, including considering whether to continue with the transaction.
3. Do the transaction documents need AER-specific closing conditions or stipulations?
Depending on the circumstances, the purchase and sale agreement may need to include closing conditions with respect to an AER advance ruling, and representations and warranties with respect to the prospective purchaser's structure, proposed team or its financial stability.
Further changes expected
There is still uncertainty regarding the impact of the changes to Directive 067 and future AER initiatives on oil and gas M&A deals in Alberta. More changes by the AER are anticipated as they attempt to further tighten their procedures for licensing and approvals which could have further impact on the Alberta oil and gas industry.
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