Business Guidelines - Actions Speak Louder than Words

by Brandon Baker

We are privileged with the opportunity to serve many privately-held businesses.  Often, the company’s organizational documents (such as an operating agreement for an LLC or bylaws for a corporation) provide good governance practices for the company. However, the actions of the owners and officers unintentionally stray from the terms of those documents.  In certain circumstances, such failures could result in a loss of the liability protection afforded by the company.  As the old saying goes, “actions speak louder than words.”  

We suggest the following guidelines for operating a privately-held business in a conscientious manner:
 

• The company’s officers should review the company’s organizational documents on a regular basis (at least annually), to ensure the company’s current operating practices, books, and records are consistent with the organizational documents.
   
• The company should have a separate bank account, titled in the name of the company and used solely for company business.
   
• Company funds should not be used for personal expenses, unless properly documented for repayment as one would do with a third party.  
   
• The company should maintain sufficient operating capital to conduct the company’s ordinary business activities.
   
• All agreements should be made in the company’s name, with the signature block noting the title of the individual signing on the company’s behalf.
   
• Any assets used for company purposes should be owned, leased, or otherwise properly titled in the company’s name.  
   
• The company should maintain sufficient insurance coverage for liability, casualty, workers' compensation, and other matters as appropriate for its business.
   
• The company’s officers should act in accordance with their fiduciary duty to the company’s owners.
   
• The company must stay current on taxes and required fees to government agencies.  Anyone conducting business in Oklahoma, whether it is a limited liability company, corporation, partnership, individual or otherwise, is now required to file an annual Business Activity Tax Return with the Oklahoma Tax Commission.  Generally, the tax is $25.00.  The Business Activity Tax, once paid, may be applied as a credit against certain taxes and fees, such as the annual fee paid to the Oklahoma Secretary of State by limited liability companies.

Each company is different and these recommendations may not apply to every company in every circumstance.  However, these suggestions will hopefully provide some helpful guidelines for the privately-held business operation.

Annual Maintenance for the Oklahoma LLC

by Brandon Baker

Limited liability companies, or “LLCs,” have become very common in the business marketplace.  One of the primary benefits of the LLC business entity, as opposed to the corporation or the limited partnership, is the LLC’s ease of operation.  However, “low maintenance” does not equal “no maintenance.”  Thus, Oklahoma LLC owners need to be attentive to certain annual maintenance requirements for their company.

Oklahoma LLCs, unlike corporations, are not required to pay annual franchise tax to the Oklahoma Tax Commission.  Instead, LLCs must file an Annual Certificate with the Oklahoma Secretary of State each year and pay a $25 annual fee.  The Annual Certificate is a simple form which recites the LLC’s name, states the street address of its principal place of business, and confirms that the LLC is an active business entity.  The Annual Certificate is due each year on the anniversary of the LLC’s creation (the date the Articles of Organization were originally filed with the Secretary of State).  

The process of filing the Annual Certificate is now conducted almost entirely through email and online filing.  The Secretary of State sends an annual reminder to the LLC’s email address of record prior to the anniversary date (usually two months in advance).  The annual reminder email contains a link, which the LLC’s owner or officer can use to file the Annual Certificate online.  

However, a surprisingly high number of LLCs fail to file an Annual Certificate each year.  If just one Annual Certificate is not filed in a timely manner, the LLC ceases to be in good standing under state law.  The loss of good standing prevents the LLC from filing lawsuits, filing documents with the Secretary of State (other than an Annual Certificate), and may hinder contractual business dealings, though it does not totally prevent them.  The good news is that the Secretary of State has streamlined the process for reinstating an inactive LLC.  An LLC can simply file an application for reinstatement, along with all past-due Annual Certificates, and payment of accrued annual fees.  

The Oklahoma LLC is an excellent choice for those looking to form a new business entity.  Though they are extremely user-friendly, Oklahoma LLCs do involve some ongoing annual maintenance.  Please feel free to contact our office if you have any questions or concerns about your current company, or if you are considering the formation of a new business entity.  

Negotiating Oil and Gas Leases

by Brandon Baker

Many Oklahomans have the good fortune to own mineral interests, whether based on inheritance or their own acquisitions and investments.  In order to drill a well for the production of oil and gas, the producer must first acquire the right to do so from the surrounding mineral owners through either a lease, a forced pooling action, or a combination of both.  As such, oil and gas leasing activity has been a mainstay in the Oklahoma economy for generations.  

Many of our clients and friends receive various lease proposals from landmen and other leasing agents.  For those with limited experience in leasing minerals, it could be tempting to focus purely on the financial terms (the lease bonus paid up-front and royalty to be paid on production) and assume the remainder of the lease is either unimportant or non-negotiable.  These assumptions are not only incorrect, they can prove problematic for the mineral owner over time.

There are several negotiable provisions in a standard Oklahoma oil and gas lease which can greatly improve the mineral owner’s position over time.  This article will provide a quick summary of a few provisions that are generally beneficial to mineral owners.

1. Limitation Clauses:  A depth clause can be utilized to restrict the minerals covered by the lease to a specific depth (usually the lowest depth penetrated by the operator’s well).  A depth clause leaves the deeper formations open for future leasing opportunities.  A so-called “Pugh Clause” limits the minerals covered by the lease to the minerals included in the drilling and spacing unit established by the Oklahoma Corporation Commission.  The Pugh Clause allows the mineral owner to re-lease any minerals not covered by the spacing unit at a later time.
    

2. Cost Deductions:  The standard oil and gas lease will allow the operator to deduct various costs of production from the mineral owner’s royalty payment.  By adding certain provisions to the lease, the mineral owner can protect against these cost deductions and increase the amount of their royalty payments.
    

3. Warranty on Title:  Mineral owners should be wary of the standard lease provision where they provide a full warranty on the ownership of the minerals.  Many mineral owners simply trust the leasing agent on the number of acres owned and the ownership of the minerals in general, only to be forced to repay some or all of their lease bonus if their ownership is proven invalid at a later point.  It is possible to lease minerals without a full warranty on title.
    

4. Commencement of Operations:  A standard oil and gas lease will provide a primary term of 3 years, which can be extended as long as oil or gas are produced if a producing well is drilled or commenced during that initial 3 year period.  We can utilize a commencement clause in the lease to specifically define commencement of operations as a drilling rig on location (as opposed to clearing trees or bulldozing a pad site, as some operators will argue to be commencement of drilling operations).
    

5.  Shut-In Royalty Clause:  The standard lease provides for a drastically reduced royalty payment during any period where the well operator has shut-in the well.  In addition a shut-in well is still considered to be producing and thus, extends the lease term.  With a shut-in royalty clause, we can limit the length of time an operator can extend the lease term with shut-in royalties.  This allows a mineral owner to pursue other leasing opportunities once that time has expired.  by Brandon Baker
    

This is not an exhaustive list, nor is it a complete explanation of each of the provisions noted above.  My goal is simply to provide a brief outline of a few provisions which can be used to a mineral owner’s advantage.  If the mineral owner is also the landowner, several other provisions are very important as well (such as use of water, access and roads, surface damage, etc.).  I should also mention that the financial terms (lease bonus and royalty) are often open to discussion and educated negotiation will sometimes result in higher payments for the mineral owner.

With careful analysis and negotiation, mineral owners can maximize their return in the short-term (with more beneficial financial terms), in the mid-term (with provisions that maximize their royalty payments and limit liability), and in the long-term (with provisions that allow them to exit the lease and pursue new leasing prospects).  There are many considerations for a mineral owner in effectively negotiating an oil and gas lease.  If you would like assistance with review, analysis, or negotiation of an oil and gas lease, please contact our office and we would be happy to serve you.