Oil Search consideration for InterOil shares would include a substantial contingent cash payment based on how big InterOil’s natural gas resource turns out to be

Oil Search, a Papua New Guinea (“PNG”) corporation listed on the Australian Stock Exchange and whose ADSs trade over the counter in the U.S., is proposing to use a newly-incorporated Yukon subsidiary to acquire (under a Yukon Plan of Arrangement) InterOil, which is a Yukon corporation listed on the NYSE but essentially all of whose assets are natural gas assets held in a PNG subsidiary. The consideration incudes not only Oil Search shares or cash (subject to a U.S.$770M cap) but also “contingent value rights,” which will trade on the ASX and will entitle the holder to a cash payment based on the extent to which an interim resource assessment of a PNG natural gas project of InterOil shows a resource of greater than 6.2 trillion cubic feet equivalent ("tcfe"). For example, if the resource is measured at 10 tcfe, the CVRs would pay U.S.$1.17 billion in total.

The Canadian tax disclosure indicates that the proceeds of the InterOil shares likely would include the estimated fair market value of the CVRs at the time of the Arrangement, and suggests that although the CVRs are legally described as “notes,” they might not be subject to the prescribed debt obligation rules given that the amount payable is “uncertain and unlimited.” There likely is no discussion of the Budget rules applicable to Reg. 7000(1)(d) obligations, as this would not affect the broader statement that whether any gain would be on income or capital account is uncertain.

The U.S. tax disclosure waffles even on the issue whether the holders can get the benefit of their basis in the CVRs, and indicates that Code s. 483 imputed interest rules likely would apply.

The Australian tax disclosure is crisply Australian.

Neal Armstrong. Summary of InterOil Booklet for its acquisition by Oil Search under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.