Cross-Border M&A in the Commodities Sector: Asset Purchases

Mergers and acquisitions (M&A) activity in the commodities trading sector has been buoyant over the past 18 months, affecting the trading operations of both financial institutions and energy companies. There have been a number of factors at play, including the collapse of significant market players, changes of ownership where new owners have a different market appetite for the particular market risk, and the desire by some market participants to rebalance asset portfolios (either by upsizing or downsizing) in response to the crisis in the financial markets.

In these circumstances, institutions and companies that take a favorable view of the sector have been able to take advantage of opportunities either to enter the market or to strengthen and diversify existing operations. Examples of transactions over this period are the acquisitions by JPMorgan of various business units of RBS Sempra Commodities; the sale by UBS AG of its commodities trading business, part of which was sold to Barclays Bank plc; and the sale of Constellation Energy's coal, freight and international commodities business to J. Aron / Goldman Sachs.

Transactions such as these present interesting structuring options, particularly in the context of risk transfer where there is a sale and purchase of the assets and liabilities of a company, which this article focuses on, rather than the shares of the business itself. Cross-border regulatory issues are also a key consideration given the international nature of many businesses in this sector.

Structuring the Transaction

The first structural decision in M&A transactions in the commodities sector, as in any other, is whether the subject of the transaction will be the shares in the company conducting the target business and holding the assets and liabilities, or only some of its assets, liabilities and business activities.

An asset purchase, particularly in the commodities trading sector, will typically be more complicated procedurally than a share purchase due to the need to transfer each of the separate assets (transactions or trading relationships) that constitute the business. Because a commodities trading portfolio will, by its very nature, involve a multitude of trading relationships with counterparties, more consents and approvals are likely to be required than on a share purchase, in particular in respect of the assignment or novation of trading contracts.

However, depending on the commercial agreement between the parties...