TOUGH TRADE-OFFS — DECISION MAKING, WITHDRAWAL AND FORCED SALE AND PUT OPTIONS IN PUBLIC TENDER PROJECTS
| Jurisdiction | Derecho Internacional |
(Mar 1999)
TOUGH TRADE-OFFS — DECISION MAKING, WITHDRAWAL AND FORCED SALE AND PUT OPTIONS IN PUBLIC TENDER PROJECTS
Baker & Botts, L.L.P.
45 Ludgate Hill
London EC4M 7JU England
Decision making, withdrawal rights and forced sale or purchase provisions are some of the most contentious and difficult issues facing consortium members in their internal arrangements in public tender projects. Approval rights are fundamental to a company's ability to retain control over its investment. However, empowering minority interest holders with control rights can result in deadlock, in turn causing investment loss or opportunity loss for all consortium members. Decision making, withdrawal rights and forced sale or purchase provisions are fundamentally linked and must be addressed as a package. No ready-made formula for addressing these issues exists that will fit all situations, as the nature of the project, the individual perspectives and experiences of the consortium members, the inter-dynamics between them, the terms of tender, and financing party and other third party transfer restrictions and other requirements will necessarily result in a tailored solution for each project within a band of reasonable commercial outcomes.
Consortium Constituency
Understanding the make-up of the consortium and the constraints on transfer imposed by third parties is the first key to addressing these thorny issues. How many equity holders will hold a major stake? (What constitutes a "major stake" depends on the number of consortium members, but 20% is a good benchmark.) How many major equity owners will have an active role in the management and/or development of the project? Is one of the participants likely to be the day-to-day decision maker for the life of the project or will leadership shift at the end of the development phase from a project developer to an operator? Will the project sponsor, an affiliate of the sponsor or a governmental entity be an equity owner? Are there institutional investors who will own an equity interest? What is the nature of the minor equity interest holders, if any? If there is to be a project company (as used herein, whether one or more, the entity or entities that own the concession rights) and the parties will not act through an unincorporated joint venture, which of the equity interest owners will also be contract parties with the "project company," and therefore have potential conflicts of interest with the project company? Where are the parent companies of the equity owners domiciled? Are there natural alignments between certain members, such that they are likely to vote as a bloc? Which consortium members will be required to retain their continued participation by the finance documents to avoid default and what constraints on transfer will exist under the tender documents? Will there be any transfer restrictions on project company ownership or operation imposed by any of the key project supply or offtake contracts?
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Project Phases
Decision making, withdrawal rights and forced sale or purchase provisions should be treated differently depending on the phase of the project. In analyzing these issues, milestones are the key dates for shifts in the risk/reward profile for the consortium, which will differ for each bid depending on the conditions of tender and the nature of the project. Key milestones for a project financed, greenfield development downstream project might be: (1) submission of the bid and posting of a bid bond (the period ending immediately prior to the posting of the bid bond is herein referred to as the "Pre-Bid Phase"); (2) granting of the award by the bid sponsor, execution of definitive concession agreements with the sponsor and posting of an award or performance bond by the consortium members or the project company (the period beginning with posting of the bid and ending immediately prior to the posting of the award or performance bond is herein referred to as the "Pre-Award Phase"); (3) the closing of project finance (the period beginning with posting of the award or performance bond and ending immediately prior to the closing of project financing is herein referred to as the "Pre-Financing Phase"); and (4) substantial completion of the project and commencement of stabilized commercial operations (the period beginning with project finance closing and ending with commencement of stabilized commercial operations is herein referred to as the "Development Phase"; the remaining period of the concession is herein referred to as the "Operating Phase").
Pre-Bid Phase
All consortium participants will likely retain absolute rights to approve the bid and the correlative right to withdraw from the consortium during the Pre-Bid Phase. The withdrawal by a consortium participant or refusal of a participant to proceed with a bid on the basis approved by other consortium members can, and often does, result in a loss of opportunity to bid and sunk costs for all consortium members.
A tool to impose discipline on consortium members to prevent withdrawal in the final stages of bid preparation that is sometimes proposed is to provide for a "drop...
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