Top 10 tips for successful mining joint ventures
27 September 2010
Australian mining companies often use joint venture structures, but there are traps for the unwary.
Here are 10 key tips for successful outcomes:
- Structure: It is important each participant obtains separate legal advice to choose the best structure. Relevant issues include liability exposure and tax consequences. Typically, joint ventures are incorporated (a company regulated by a shareholders agreement) or unincorporated (a contractual arrangement regulated by a joint venture agreement).
- Relationship: Set out clearly the intended relationship between the parties. Generally the participants meet the cost of the project and share in any product in proportion to their interests. For an unincorporated joint venture, it is critical the participants do not share in profit to avoid any suggestion of a partnership (for tax and liability reasons).
- Objectives and scope: Ensure there is a common objective and purpose, including development time frames. Clearly document the intended objectives and the scope of the venture activities. Develop short-term and long-term business plans at the start as this is a common area for dispute when the parties differ on the future direction of the project.
- Assets: Usually assets are held as tenants in common in proportion to joint venture interests. Consider alternative structures such as contributing/committing assets to the joint venture (with a participant retaining ownership of the specific assets) or a farm-in arrangement (where an incoming participant earns an interest by funding all the costs for a defined period). Also consider at the outset how the assets are dealt with at the end of the joint venture.
- Financing: Consider whether a participant can use its interest to secure its finance (and whether the purpose is to be solely for the joint venture). It is best to set out the requirements so that future financing is not delayed.
- Exit mechanisms: The agreement should regulate how and when a participant may transfer its interest and if there are to be pre-emptive rights that allow a participant the opportunity to purchase the interest of the exiting participant. Also consider how a change in ownership or control of a participant’s entity is dealt with (usually deemed to be a default if done without consent). The detail of these clauses and their application to each participant must be considered carefully. Think of all possible scenarios (from both sides as you may be a continuing or an exiting party) and list any specific exceptions.
- Ownership changes: As it is unlikely the parties will always have the same percentage interests, consider the impact if the relative interests of the parties change or additional parties are admitted. A minority participant should ensure its interests are protected e.g. it is represented in the requisite meeting quorum and that certain decisions require a unanimous vote.
- Default: The agreement should be clear on what default is, the consequences and the rights of the non-defaulting participant. Of particular importance is the situation where a participant is unable or unwilling to contribute its required proportion of costs as this will impact the project operations.
- Dispute Resolution: Even if the parties start out on good terms, never assume the dispute clauses will not be used. The future direction of the project, funding and operational issues are also common dispute areas. The agreement should contain dispute resolution procedures which differ depending on the nature of the dispute e.g. reference to CEOs of the parties, mediation or reference to an industry expert. Make sure these clauses include realistic timetables and clearly set out what the parties need to do.
- Deadlocks: Particularly in 50/50 joint ventures, consider inserting ‘deadlock’ provisions so if parties cannot agree on fundamental issues, a procedure enables a party to buy out the interests of, or be bought out by, those involved in the deadlock. The clause should provide incentives to reach agreement.
In conclusion, a successful joint venture requires a clear understanding and agreement on the objectives and direction of the venture and what each participant aims to gain from their involvement. If the above tips are taken into account and a carefully drafted joint venture agreement entered into, a joint venture should offer significant flexibility and allow maximum commercial benefits to be achieved from the project.
Further information
For more information contact: Kristie Fankhauser on +61 7 3233 8876.
