ExxonMobil acquisition of InterOil would include a contingent U.S.$1.4B cash payment to the InterOil shareholders which very well would have to be repaid in whole or in part

It is proposed that a newly-incorporated B.C. subsidiary of ExxonMobil will acquire InterOil under a Yukon Plan of Arrangement. InterOil is a Yukon corporation listed on the NYSE but essentially all of whose assets are natural gas assets held in a Papua New Guinea (“PNG”) subsidiary. The consideration for each InterOil share consists of that number of ExxonMobil shares having a fixed value of U.S.$45.00 per share, plus a cash payment of U.S.$26.87 per share (or U.S.$1.37B in total). However the cash “contingent resource payment” (or “CRP”) of U.S.$26.87 per share, which will be held under an escrow arrangement, will have to be repaid in full if an interim resource assessment of a PNG natural gas project of InterOil, which is expected to be completed in the 2nd quarter of 2017, shows a resource of less than 6.2 trillion cubic feet equivalent ("tcfe"), and with the CRP having to be repaid on a pro rata basis if the interim assessment shows a resource of between 6.2 and 10 tcfe.

The Canadian tax disclosure indicates that the full U.S.$26.87 per share CRP consideration (as well as, of course, the share consideration of U.S.$45 per share) will be required to be included in computing a resident InterOil shareholder’s proceeds of disposition for 2016, but (under s. 43) if the repayment obligation is triggered before the filing due-date for the shareholder’s return, the repayment would reduce those proceeds of disposition. If the reduction does not occur until later, it instead will be recognized separately as a capital loss.

The U.S.$1.37B up-front CRP payment will be lent on behalf of the former InterOil shareholders back to ExxonMobil under a loan which will mature after the completion of the interim resource assessment and at an interest rate which will not be determined until such maturity date. The disclosure discusses whether the contingent nature of the interest rate means that there is no interest accrual obligation.

In the previous agreement of InterOil with Oil Search (which was terminated with the payment of a $60M break fee on behalf of InterOil), Oil Search offered a contingent cash payment which was not capped at 10 tcfe, which resulted in significantly different tax issues.

Neal Armstrong. Summary of InterOil Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.