95 1877 La.App. 1 Cir. 5/10/96, Fina Oil and Chemical Co. v. Amoco Production Co.

• Citation: 673 So.2d 668
• Parties: 95 1877 La.App. 1 Cir
• Decision Date: 10 May 1996
• Court: Court of Appeal of Louisiana (US)

Page 668

673 So.2d 668

95 1877 La.App. 1 Cir. 5/10/96

FINA OIL AND CHEMICAL CO. v. AMOCO PRODUCTION CO., et al.

No. 95 CA 1877.

Court of Appeal of Louisiana,

First Circuit.

May 10, 1996.

David C. Treen, Charles K. Reasonover, Francis J. Barry, New Orleans, for Plaintiff--Appellant--Fina Oil and Chemical Co.

John M. McCollam, Philip N. Asprodites, Scott A. O'Connor, New Orleans, for Defendants--Appellees--Amoco Production Company, MW Petroleum Corporation and Apache Corporation.

William F. Bailey, Lafayette, for Defendants--Appellees--Amoco Production Company, MW Petroleum Corporation and Apache Corporation.

Before LOTTINGER, C.J., and GONZALES and FITZSIMMONS, JJ.

[95 1877 La.App. 1 Cir. 2] FITZSIMMONS, Judge.

Amoco Production Company (Amoco) operated, and owned a 50% interest in, three oil and gas fields in Louisiana. Operation of the three oil and gas fields was governed by Joint Operating Agreements (JOAs). Amoco transferred its lease interests in the three fields; Charenton, Lake Boeuf, and Lake Boudreaux, to a subsidiary corporation, MW Petroleum Corporation (MW). Subsequently, Apache Corporation (Apache) bought all of the stock of MW.

Fina Oil and Chemical Company (Fina), a non-operator/50% interest holder in the three fields, protested the transfer of the lease interests by Amoco without notice to Fina. Plaintiff, Fina, sued defendants, Amoco, MW, and Apache. Fina claimed that the transfer triggered the preferential rights option to purchase and the operator selection clauses of the JOAs. Amoco, MW, and Apache asserted that the transfer to MW was exempt under the JOAs, and the sale of stock of a corporation was outside the scope of the JOAs.

Fina and the defendants filed motions for summary judgment. All parties agreed that no genuine issues of material fact remained. The issue was whether, as a matter of law, the sale of stock of MW, the holder of the lease interests, triggered the preferential rights or operator selection clauses. The trial court found that the sale of 100% of MW stock to Apache did not trigger the preferential rights or operator selection clauses. The trial court granted defendants' motion for summary judgment, and denied Fina's. Fina moved for a new trial. The motion was denied. Fina appealed. We affirm.

MW was formally incorporated on October 2, 1990. Initially, Amoco transferred between 500 million and 1 billion dollars worth of properties to MW. This was done as part of a corporate restructuring plan. MW was marketed world wide. Because of the dollars involved, no serious offers for MW were made. The package [95 1877 La.App. 1 Cir. 3] of properties was later downsized to make the MW package more affordable. The plan was worked out after consultation with the investment banking firm of Morgan Stanley & Co. The goal was to streamline Amoco by divestment of certain non-core assets to a subsidiary. A secondary consideration was to avoid employee downsizing by offering employment opportunities with MW to Amoco employees. One possibility considered early on was a traditional reorganization: the shares of the subsidiary would be distributed to Amoco's shareholders. Another possibility was sale of the new subsidiary.

The selection criteria for fields to be divested included high operating costs, isolated fields, and poor financial returns. Fields burdened with preferential rights or operator clauses was not a selection criteria in any of the documents in the record.

The selected assets were transferred to the new subsidiary corporation, MW, with a management team in place. The new corporation was initially marketed to foreign investors. At the time of the sale of MW to Apache, the MW properties numbered in the hundreds and were found in eleven different states. The MW properties included the lease interests in the three Louisiana fields. After the transfer by Amoco to MW, MW became the holder-owner of the Louisiana lease interests and succeeded to the rights and obligations of the JOA provisions.

Subsequently, MW became the recognized operator of the lease interests. On June 30, 1991, Apache purchased all of the stock of MW for approximately 545 million dollars. As of the date of the trial, MW still owned the lease interests.

JOINT OPERATING AGREEMENTS

The JOAs contain a preferential right and option to purchase for party A that is triggered by a bona fide offer to party B for B's lease interest, which party B is willing to accept. The applicable preferential rights clauses in all three JOAs are [95 1877 La.App. 1 Cir. 4] fundamentally the same. In the most restrictive agreement, the preferential right does not apply to transfers by a corporate party in connection with a merger, consolidation, or reorganization between a parent, subsidiary or affiliated company.

The only operator selection clause subject to the motion for summary judgment was the one in the Charenton Field JOA. The pertinent part of that clause provided:

Should Operator ... sell or otherwise dispose of more than 50% of its interest in the lease acreage ... (except to an affiliated, subsidiary, or successor corporation, which shall not be regarded as a disposition of interest), it shall thereupon cease to be Operator hereunder and Non-Operator, if it then owns as much as 50% interest, shall become Operator.

Thus, under the JOAs, a transfer or sale of the lease interests could trigger the JOA provisions in question, unless the transfer was exempt. One of the recognized exemptions was a transfer to a subsidiary. Under the narrowest preferential rights clauses, the transfer had to be in connection with a reorganization, merger, or consolidation.

Amoco asserts that the transfer to MW was part of a reorganization. Reorganization "is a general term describing corporate amalgamations or readjustments. The classification of the Internal Revenue Code is widely used in general corporate literature" as examples of reorganizations. Hamilton, The Law of Corporations 350 (Nutshell Series) (1980 West). Reorganizations include statutory merger or consolidation, exchange of voting shares, a spin off of assets from one corporation to a new corporation, a sell off of a subsidiary, recapitalization, or a change of identity or place of organization. Id.; Henn & Alexander, Law of Corporations § 351 (3d ed. 1983).

TRANSFER TO MW

Even under the most restrictive provision in the preferential rights clauses or the Charenton operator clause, transfers of the lease interests made to subsidiary corporations [95 1877 La.App. 1 Cir. 5] in connection with a reorganization are exempt. No one disputes that the transfer to MW was exempt. In fact, Fina admitted in oral argument on the motions for summary judgment that Amoco's transfer of interests to MW did not trigger the JOA.

On appeal, as on the motion for summary judgment, Fina does not rely on an argument that material facts were still at issue. It is the trial court's interpretation of the JOAs and the ultimate conclusions to be drawn from the facts that Fina believes are wrong. Fina asserts that, based on the essential facts, the preferential rights and operator clauses were triggered. Fina puts forth two possible bases: either the sale of MW was prohibited and not exempt under the JOAs, or, MW was not operated as a separate corporation, and the sale was actually a prohibited sale of assets.

SALE OF MW

To decide this case, we must answer three questions. Was the sale of the corporate stock of MW prohibited by the JOA? Was the sale of stock a triggering event that resulted in a transfer of the burdened lease interests? Should the corporate entity be disregarded, and the sale be treated as an asset sale?

A corporation is a separate entity from its shareholders. La.C.C. art. 24; Jones v. Briley, 593 So.2d 391, 394 (La.App. 1st Cir.1991). The sale of corporate shares is not a sale of assets. The shareholders' interest in the corporation does not equate to ownership by the shareholder of specific corporation assets. La.R.S. 12: 41B(4); Courtney Corporation v. Demarest, 379 So.2d 812, 812 (La.App. 4th Cir.), writ denied, 382 So.2d 166 (La.1980).

Most preferential right provisions are drafted so as to be triggered by a 'sale.' Because of the broad range of interpretations that can be derived from that term, the determination of which transfers will trigger the preferential right is difficult. In making this determination, courts have generally placed emphasis on either the presence or absence of arm's length dealing between the owner of the burdened interest and the third party transferee or upon the effect of the conveyance as placing the property beyond the reach of the holder of the right.

[95 1877 La.App. 1 Cir. 6] ... [A]n absence of arm's length dealing in transactions between commercially related parties is ... generally held to preclude the application of preferential right provisions. Thus, courts have ruled that a triggering sale has not occurred when a burdened property is transferred to the owner's wholly owned corporation.... Following the same reasoning, a federal court [, in Gamble v. Cornell Oil Co., 154 F.Supp. 581, 588 n. 19 (W.D.Ok.1957), affirmed, 260 F.2d 860 (10th Cir.1958) ] held that where a corporation owned the burdened interest, the sale of all the corporation's stock did not constitute a sale that would invoke a preferential right provision.

Harlan Abright, Preferential Right Provisions and their Applicability to Oil and Gas Instruments, 32 Sw.L.J. 803, 811 (1978) (footnotes omitted).

Fina admits that the sale of some or all of the corporate stock of Amoco, while Amoco owned the lease interests, would not have triggered the preferential rights and operator selection clauses. In fact, authority cited by Fina specifically states that sale of all of the stock of the holder of lease interests would not trigger preferential rights. The sale of the stock is not a sale of the burdened lease interests. See Harry M. Reasoner, Preferential Purchase Rights...