What You Should Know When Purchasing an Oil&Gas or Mining Company
Almat Daumov, Partner, GRATA International
The sale and purchase of oil and gas or mining companies are one of the most complex transactions. There are many nuances in checking the acquired asset, obtaining transaction permits from state authorities, and taxation aspects. The article outlines the main practical tips for committing such transactions in Kazakhstan.
Legal Due Diligence
No matter whether it is purchase of subsoils use right (asset deal) or company that owns subsoil use right (share deal), or holding company, in all these cases the legal due diligence of the target asset is recommendable.
The subsoil use industry is associated with high risks:
- risks of no commercial discovery after exploration;
- failure of actual confirmation of reserves previously approved (including the geological misrepresentation);
- risks of termination of the subsoil use contract due to violation of the license and contract terms, etc.
In addition to operating activities, the company's 'corporate history' is also subject to the check. For instance, when transactions for the change of control over a subsoil user committed without the permit of the competent authority are detected, there are high risks of terminating the subsoil use contract even with the new owner of the subsoil use project. As another precedent there is the case when a transaction for sale-and-purchase of a subsoil user was cancelled under the claim of spouses. Individuals-shareholders of LLP sold their shares and in a few years their spouses have filed claims to invalidate the transactions due to the absence of notarised consents of the spouses to the disposal of joint property. Any such violations affect the 'quality' of the acquired asset and can help to reduce the price or receive seller's guarantees to compensate the buyer for damage, if the identified risks are occurred after the transaction closing.
Tax issues are subject to special analysis when structuring a transaction. As a rule, VAT and income tax are relevant for such transactions.
VAT arises, where the subsoil use right and related assets (e.g., a shift camp, gold recovery plant, or field construction facilities) are sold (a subsoil use contract is assigned). At the same time, VAT can be avoided by structuring the transaction through the sale of shares in a company that owns such assets.
Income tax and mitigation thereof are more complicated issues. A seller tries to structure the transaction with minimal own taxation. In this case, the transaction parties should always remember the following three things.