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©2013 Vinson & Elkins LLPConfidential & Proprietary Chinese Energy Investments into the U.S. Mingda Zhao | May 13, 2013
©2013 Vinson & Elkins LLPConfidential & Proprietary U.S. has enjoyed increased oil and gas exploration activities due to shale gas/oil developments Chinese companies are increasingly active in the sector Non-oil and gas Chinese energy investments are also increasing Introduction
©2013 Vinson & Elkins LLPConfidential & Proprietary3 Trends in Exploration Activity Source: EIA, Annual Energy Outlook Executive Summary (2012)
©2013 Vinson & Elkins LLPConfidential & Proprietary4 Drilling Activity Source: Wall Street Journal, October 18, 2011
©2013 Vinson & Elkins LLPConfidential & Proprietary5 Trends in Exploration Activity Source: fracktracker.org
©2013 Vinson & Elkins LLPConfidential & Proprietary NOTE: This layout is for a large amount of text/content only. Beware using as your main text slides so that you keep title bar formatting consistent. SMALL Title Bar Foreign Domestic Amount PartnerCountryPartnerShale Play($B)Year BPUKChesapeakeWoodford BGUKEXCOMarcellus StatoilNorwayChesapeakeMarcellus RelianceIndiaPioneerEagle Ford RelianceIndiaAtlasMarcellus RelianceIndiaCarrizoMarcellus TotalFranceChesapeakeBarnett CNOOCChinaChesapeakeEagle Ford BGUKEXCOHaynesville MitsuiJapanAnadarkoMarcellus CNOOCChinaChesapeakeNiobrara KNOCKoreaAnadarkoEagle Ford MarubeniJapanMarathonNiobrara MitsuiJapanSM EnergyEagle Ford GAILIndiaCarrizoEagle Ford TotalFranceChesapeake/EnerVestUtica SinopecChinaDevonTMS, Niobrara, Utica MarubeniJapanHunt OilEagle Ford Indian OilIndiaCarrizoNiobrara SumitomoJapanDevonCline, Midland-Wolfcamp SinopecChinaChesapeakeMississippi Lime SinochemChinaPioneerWolfcamp Tokyo GasJapanQuicksilverBarnett Total…… Foreign Joint Venture Investment in U.S. Shale Gas and Tight Oil Plays
©2013 Vinson & Elkins LLPConfidential & Proprietary7 Entity choice Cross border tax considerations Technology transfer restrictions Qualifications to own federal and state real property interests Unfamiliar property concepts Private ownership of mineral interests Title due diligence Disclosure requirements CFIUS considerations Anti-trust review Certain Considerations
©2013 Vinson & Elkins LLPConfidential & Proprietary8 Asset Versus Entity Deals Joint Ventures –Large JV transactions (>$500 million) tend to be with foreign investors –Fewer large JV deals with mid-size ($300-$500 million) to small (>$100 million) JV deals becoming more common –More private equity/financial player investment Deal Structure: generally direct ownership of leasehold interests (but private equity favors investments through an entity) –Transferability/encumbrance of interests –Gathering/marketing issues –Non-consent issues –Real property issues Deal Structure
©2013 Vinson & Elkins LLPConfidential & Proprietary Type of entity –Corporation –LLC (Limited Liability Company) –Partnership –Sole Proprietor (N/A) –S-Corporation (N/A) Select considerations regarding formation of companies in the U.S. –Whether the corporate law of the individual state is flexible and business-friendly –Whether the courts of that state have a reputation of reaching reasonable and fair conclusions when construing the corporation laws –Capital requirement and number of shareholder –Cost –Tax implications –Privacy State corporate governance requirements Company Formation & Jurisdictional Planning in the U.S. 9
©2013 Vinson & Elkins LLPConfidential & Proprietary Types of U.S. Tax –Federal taxation –State taxation –Local taxation U.S. individuals, corporations and their foreign branches must pay U.S. federal, state and local tax on their worldwide income Taxation the U.S. 10
©2013 Vinson & Elkins LLPConfidential & Proprietary Technology transfer restrictions IP related issues –Patents (most common) –Registered copyrights –Registered trademarks Certain remedies of 337 violation –Exclusion orders (limited or general) –Cease and desist orders –No damages –Enforcement of ITC orders by CPB Technology 11
©2013 Vinson & Elkins LLPConfidential & Proprietary12 Federal & State Lands –Public domain lands and acquired lands –Western states – many federal lands, some have large tracts of state lands –Texas – small amount of federal lands Private Lands (Texas) –Most of the lands in Texas are private lands –The State and its predecessors granted the lands to private parties –The grants from the State or its predecessors usually included all or part of the minerals –In some cases the State or its predecessors reserved a portion of the minerals or a right to a portion of the royalties U.S. Land and Mineral Ownership
©2013 Vinson & Elkins LLPConfidential & Proprietary Federal onshore leases Federal offshore leases State leases Indian leases Solutions Foreign Ownership Restrictions 13
©2013 Vinson & Elkins LLPConfidential & Proprietary14 Potential Transaction Issues CFIUS Overview Committee on Foreign Investment in the United States Conducts the U.S. Government’s inter-agency review of foreign direct investment for national security concerns and reports directly to the President Has the power to recommend that the President “suspend or prohibit” transactions that threaten national security Key jurisdictional elements: Foreign acquirer Control of U.S. business CFIUS filing timeline: Full Investigation (45 Days)Initial Review (30 Days) Presidential Consideration (15 Days) Typical Total Process From Filing Date (90 Days) Commences upon accepted “complete” filing. Review by CFIUS members. Majority of reviews completed at this stage. If identified national security concern, CFIUS commences full investigation. Common for state-controlled acquirors and sensitive assets/industries. If no settlement, President has final authority. Exceedingly rare to submit to President.
©2013 Vinson & Elkins LLPConfidential & Proprietary15 CFIUS Overview (Cont’d) An increased percentage of CFIUS filings continue to be subjected to a second- level “investigation” period Higher percentage of CFIUS reviews required companies to implement mitigation measures CFIUS has the authority to initiate investigations on its own account and it has increasingly exercised its authority, requiring parties to submit joint voluntary notices CFIUS has shown an increasing interest in energy transactions Recent V&E experience with CFIUS in public mergers: –Statoil/Brigham Exploration: No CFIUS condition to tender offer and no CFIUS filing was made initially; CFIUS requested that Statoil and Brigham make a filing, but did not conduct a full investigation. Closed prior to completion of initial review period. –CB&I/Shaw Group: CFIUS approval was a condition to closing (target bore risk); filing made and full investigation was undertaken. Clearance was successfully received. –Technip/Global Industries: CFIUS approval was a condition to closing (target bore risk); filing made and no full investigation was undertaken. Potential Transaction Issues
©2013 Vinson & Elkins LLPConfidential & Proprietary16 If non-U.S. acquirer competes with target, may trigger U.S. federal antitrust scrutiny or state regulatory scrutiny –Competition may be direct or indirect The review process can take months, and result in: –Forced divestitures –Blocked transactions (see, e.g., AT&T/T-Mobile) Regardless of whether there are questions of competition, HSR filing must be made for most investments of greater than $66 million and certain smaller investments –Minimum of 30 days post-filing prior to clearance (15 days in tender offer) U.S. Competition Review – Antitrust Scrutiny/HSR
©2013 Vinson & Elkins LLPConfidential & Proprietary17 U.S. Competition Review In addition, the HSR filing requirements also provide for thresholds for subsequent acquisitions of voting securities The FTC treats acquisitions of voting securities on a cumulative basis. That is, prior acquisitions of voting securities of the same party are included in the valuation of future transactions between the same parties Whether an HSR filing is required in a subsequent acquisition between the same parties depends on the cumulative value of what the buyer will hold post-transaction However, it should be noted that FTC would view the subsequent related transaction collapsed with the prior transaction between the same parties as one transaction if the subsequent related transaction is fixed at the time when the prior transaction is closed
©2013 Vinson & Elkins LLPConfidential & Proprietary18 Purpose: Prohibits U.S. companies and individuals corruptly giving anything of value to any foreign official; FCPA also regulates the financial accounting of the companies listed on the U.S. exchange Scope: Not only apply to the U.S. companies, but also apply to foreign companies listed on the U.S. exchange and foreign companies that have operations in the U.S. The Anti-bribery Provisions The Books and Record Provisions Foreign Corrupt Practices Act (FCPA)
©2013 Vinson & Elkins LLPConfidential & Proprietary NOTE: This layout is for a large amount of text/content only. Beware using as your main text slides so that you keep title bar formatting consistent. SMALL Title Bar 19 Practical Chinese Regulatory Approval Process
©2013 Vinson & Elkins LLPConfidential & Proprietary20 Integration of Company Culture –Language –Management style Labor Contract Management –Retention Strategy –Compliance with local laws –Labor union Labor
©2013 Vinson & Elkins LLPConfidential & Proprietary21 The following issues may become obstacles to achieving successful integration after closing: –Employee disputes (e.g., departure of senior executives) –Violation of anti-trust laws and regulations –Violation of foreign investment laws and regulations –Major litigations over assets –Breach of material contracts –False financial statements –Disputes over product liability –Intellectual property defects –Environmental issues –Corruption Issues that May Encounter during Integration Process
©2013 Vinson & Elkins LLPConfidential & Proprietary22 Q&A Thank You Mingda Zhao Vinson & Elkins LLP
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