Onward and Upward with Upstream Deals: A Conversation with V&E Partner Stephen Gill

When it comes to M&A no two deals are alike. But in the field of upstream public M&A, one thing has remained consistent: V&E’s dominance.

In fact, from 2014 to 2018 V&E was involved in 14 out of a total of 23 — about 60% — of transactions involving the purchase of a public company with a market capitalization above $100 million, according to Capital IQ. More public upstream companies and their boards turned to V&E to handle their transactions than any other law firm in the country.

“We’re the go-to firm in this space,” said V&E partner Steve Gill.

Gill should know. Not only does he lead V&E’s public M&A practice, he has been personally involved in 10 out of those 14 upstream deals.

Last year was particularly busy. Gill’s upstream M&A work in 2018 included, among others, representing RSP Permian Inc. in its $9.6 billion sale to Concho Resources Inc. and advising WildHorse Resource Development Corp. in its $4.1 billion sale to Chesapeake Energy Corp.

The V&E partner recently sat down to answer questions about how the firm has come to dominate upstream public M&A, the specialized nature of these deals, and the outlook for M&A activity in the space. Here’s what he had to say.

V&E was involved in 14 out of 23 public upstream M&A deals over the last five years, representing both buyers and sellers. How has the firm managed to stay on top?

There are three reasons. First of all, V&E is the world’s leading energy law firm.¹ Our name is synonymous with energy, and specifically with upstream companies. That, in turn, is one of the reasons why we have so many upstream companies that are clients of the firm. Much of our deal work comes from our existing client base.

Second is our knowledge and understanding of the industry. About 80% of the legal work involved in doing these deals is industry agnostic. But 20% is oil and gas specific. Oil and gas is in our DNA.

The third reason is our reputation. There are companies that may not use us on a day-to-day basis, but they call on us when they get involved in material M&A activity.

Take Denbury Resources. We historically have not handled the company’s corporate work. But I got a call from Denbury’s general counsel saying, “I hear you’re the guy who does these deals.” We were retained, and we went on to represent Denbury on its agreement to purchase Penn Virginia Corp. for $1.7 billion.

Can you elaborate on the kind of insight V&E brings to upstream M&A deals that clients might not get elsewhere?

We understand the issues the energy industry is facing. That’s especially important when an acquirer is conducting due diligence. If you don’t know what to look for, you run the risk of ignoring items that might be critical.

For example, in the oil field space there are some companies that improperly report the way they classify employees. These companies treat workers as independent contractors, or salaried employees, when in reality they are hourly employees.

If these workers work overtime, under the federal labor laws, they’re entitled to time and a half. If you fail to properly classify them as employees, you might not only have to pay damages, but you could be subject to penalties of two times the damages.

Let’s say you’ve bought a company where this is the case. If you didn’t know that was an issue ahead of time, you might find yourself on the losing end of a class action lawsuit where you owe $100 million in fines and penalties. Well, it would have been nice to know that before you did the merger.

What is the difference between public M&A and private M&A deals?

A public M&A transaction is one in which a public company is the target. The public company is no longer going to exist in its current form, it will either become a subsidiary of another public company, or it will be taken private. These are often extremely high profile, bet-the-company transactions, because this is the end of the line for that company.

Invariably these deals result in lawsuits brought by plaintiffs’ lawyers purporting to represent shareholders, who allege that the board of directors violated its fiduciary duties.

So the directors’ reputations are on the line, their careers are on the line, the company is on the line. As a result, these transactions require counsel that is highly experienced and knowledgeable of this field.

What about activists? Are they becoming more active in energy company M&A?

In 2014, when commodity prices dropped, activists took their money out of the energy sector and moved on. Now that the industry has rebounded, activists have come back, and they’re increasingly involved in M&A.

In some cases, activists are pressing companies to merge, and in other cases they’re challenging transactions after they’re signed. While you can’t predict activist activity, it behooves upstream companies to choose M&A counsel that is highly experienced in shareholder activism defense.

V&E is a leading defender of public companies under attack by shareholder activists. In fact, we were involved in more activist situations defending publicly traded companies than any law firm in the country.² So being leaders in the public M&A space and the activist space is really comforting to boards that engage us as counsel.

What’s the outlook for M&A activity in the upstream space?

Smaller companies are finding it harder to compete as standalone companies. At the same time, larger companies are finding they need more scale to improve operational efficiencies and boost shareholder value.

So there’s a whole swath of companies that are at an inflection point where they either need to get bought, or they need to acquire somebody else. I see a wave of consolidation ahead.

^{1 Euromoney, 1995-Present; Based upon the number of lawyers named in the Guide to the World’s Leading Energy & Natural Resource Lawyers}

^{2 Activist Insight Shareholder Activism Scorecard, 2018}