Thursday, July 14, 2011

ConocoPhillips Separation Looks Good for Shareholders, with a Few Legal Hoops Remaining

ConocoPhillips announced separation into separate E&P and R&M companies today. The spin-off is likely during the first half of 2012. ConocoPhillips' major businesses are well positioned in their respective markets, so the resulting spin-off companies should look strong from a financial perspective. See my article on Spin-Off transactions.

ConocoPhillips was a top performer among integrated oil companies during 2010. Leading analysts project that the company will earn $7.75 per share and dividends will rise by 10% annually in 2011 - 2012.


The ConocoPhillips board approved the separation yesterday.

A ruling from the IRS is required to ensure this transaction qualifies for tax-free treatment (though meeting the requirements does not appear to be an issue).

Neither FTC nor shareholder approval is required.

Wednesday, July 13, 2011

FTC and DOJ Revise HSR Form and Filing Requirements with Special Focus on Energy MLPs

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have announced major revisions to the Hart-Scott-Rodino (HSR) Report Form and the Premerger Notification Rules.


The revisions are expected to come into effect in early August, 30 days after publication in the Federal Register.

The changes sweep away the requirements for parties to provide information including:

(i) Copies of documents already filed with the Securities and Exchange Commission;

(ii) Economic code "base year" data; and

(iii) Detailed breakdowns on all the voting securities to be acquired.

Despite the FTC’s aim to streamline the filing process, in some areas the filing burden has arguably increased. In particular, some controversial changes survived an 11-month consultation, albeit in a watered-down form.

In new Item 4(d) of the Form, all parties will be required to disclose all "confidential information memoranda" prepared by or for officers or directors of their ultimate parent companies in the year before the date of filing. This extends to studies, surveys, analyses and reports prepared by investment bankers, consultants and other advisers.

Perhaps more significantly, the revised Form provides a broad definition of a new term, "associate," to define entities under common management with the acquiring person, but not controlled by the acquiring person. The FTC has been concerned about the lack of information available about families of entities that fall outside the scope of the HSR Rules, and the antitrust ramifications of acquisitions involving them. (Master Limited Partnerships in the energy industry are highlighted in particular.) The new reporting demands apply to entities under "common investment or operational management" with the filing party and place detailed notification requirements upon them. The change means that private equity and investment funds could now be caught by disclosure requirements.

Under new Item 6(c)(ii), an acquiring party must report associates' holdings of voting securities and non-corporate interests in the target, where they are of five percent or more but less than 50 percent. This requirement extends to entities that have six-digit NAICS industry codes that overlap with the target's. Similarly, Item 7 will require information about "associate" entities.

The method of reporting revenue has also been revised (Item 5). All manufacturers – whether domestic or foreign – will be required to report revenue from sales of their products only under 10-digit NAICS codes. Sales of products that are only sold, and not manufactured, by the parties will continue to be reported under wholesaling or retailing codes.

Other minor revisions have been made to complete the changes made to the HSR Rules in 2005 that related to unincorporated entities.

The revisions will be published in the Federal Register within the next few days and will take effect 30 days after the date of publication.

EPA and Coast Guard Announce Agreement to Jointly Enforce US and International Air Pollution Requirements

The US Environmental Protection Agency (US EPA) and the US Coast Guard (USCG) recently announced an agreement (MOU) to jointly enforce US (Act to Prevent Pollution from Ships) and international air pollution (MARPOL Annex VI) requirements for vessels operating in US waters. These requirements establish limits on nitrogen oxides (NOx) emissions and require the use of fuel with lower sulfur content, in the latest efforts to protect human health and the marine environment by reducing ozone-producing pollution. The most stringent requirements apply to ships operating within 200 nautical miles of the coast of North America.


In US EPA’s words, "[t]oday’s agreement forges a strong partnership between EPA and the US Coast Guard, advancing our shared commitment to enforce air emissions standards for ships operating in US waters. Reducing harmful air pollution is a priority for EPA and by working with the Coast Guard we will ensure that the ships moving through our waters meet their environmental obligations, protecting our nation’s air quality and the health of our coastal communities."

These sentiments were echoed by USCG leadership. "This agreement demonstrates the Coast Guard’s long-standing commitment to protecting our nation’s marine environment," said Rear Adm. Kevin Cook, Director of Prevention Policy for the USCG. "Aligning our capabilities with EPA enhances our commitment to the marine environment while minimizing the impact on shipping."

By way of background, MARPOL was developed through the International Maritime Organization (IMO), the United Nations agency dealing with maritime safety and security, as well as the prevention of marine pollution from ships. MARPOL is the main international agreement covering all types of pollution from ships. Air pollution from ships is specifically addressed in Annex VI of the MARPOL treaty, which includes requirements applicable to the manufacture, certification, and operation of vessels and engines, as well as fuel quality used in vessels in the waters of the United States. Since January 2009 all vessels operating in US waters must be in compliance with MARPOL Annex VI regulations, but enforcement has lagged.


The purpose of the MOU was to establish terms by which US EPA and USCG can work together to implement and enforce Annex VI requirements. While the MOU does not add any new compliance requirements, it does signal that enforcement of the requirements has become a top priority. US EPA and USCG also sent a letter to the maritime industry notifying them of the MOU, and to advise that US EPA and USCG are taking measures to promote compliance, including investigating potential violations and pursuing enforcement actions with penalties for violations. The central provisions of the MOU relate to vessel inspections, certification, examination and investigations. Importantly, the MOU also discusses enforcement by criminal prosecution and penalties.

More information is available on US EPA's website.


This development signals upcoming enforcement on the part of both agencies. Shipowners, ship operators, shipbuilders, marine diesel engine manufacturers, marine fuel suppliers and marine insurance providers should be prepared to deal with increased enforcement and prosecution of air pollution laws.