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Opinion: Don’t risk your business at OTC

Opinion: Peter Murray
Opinion: Peter Murray

Shortly oil industry executives of the world will descend on Houston for the 45th annual Offshore Technology Conference. With more than 100,000 attending last year 2014 looks like it will be another busy year for the show.

With such a crowd one can’t deny it’s a good opportunity to announce the latest international joint ventures.

No doubt some delegates will already have their latest collaboration to announce, whilst others will be hoping to bump into their new best friends walking the show.

You can picture the photo-opportunity now, lots of smiles and a firm handshake in front of a glossy background.
So far so good you say.

However we all know shareholders ultimately want profits not press releases. In-house and independent lawyers alike groan when they first hear of a project in the news.

Weak risk management gives us lawyers job security, but we find it frustrating to inherit problems that we could easily have helped avoid. So to increase your chances of getting from press release to profit and enhance your company’s risk management as you seek to embark on your new relationships here’s a few lessons from ones that went wrong.

First, Due Diligence who you are dealing with? Get references if you can. How long has the business been trading? Does the precise company you are presented with have a good covenant and not just its quoted parent company?

Get a confidentiality agreement signed early on, before detailed negotiations are entered into.

Memorandum of Understandings are good, but we all know they might not be worth the paper they are written on. What counts are orders that get paid for. Why not negotiate the first order at the same time as negotiating the MOU? If it is too difficult to negotiate the order there is a lesson in that.

Get local law advice before you sign. Common sense depends on where you are. Don’t assume terms implied into a contract will be reasonable (such as not paying the other side’s expenses if you withdraw from negotiations.

Postponing in-country tax advice until after you have started trading can be an expensive mistake.

Consider using a special purpose vehicle (a new company) for your own side of the deal, and thereby protecting your main business by a limited liability firewall. If you are going to do this though, it looks better if you form it before the negotiations commence!

Unlike on the formation of a new venture, which receives lots of publicity, the observer may need to read the notes to subsequent published accounts to see what actually happens. Perhaps just 12 months later the outpost can be closed and the investment written off. Business is about taking risks, but those risks can be managed.

Peter Murray is a partner at Scottish law firm Ledingham Chalmers where he specialises in UK corporate law and international projects.

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