CHAPTER 15 MINING MATERIAL AGREEMENTS AND UNRECORDED DOCUMENTS: WHAT'S HIDING UNDER THAT PILE OF PAPER?

• Jurisdiction: United States

Due Diligence in Mining and Oil & Gas Transactions
(Apr 2010)
CHAPTER 15
MINING MATERIAL AGREEMENTS AND UNRECORDED DOCUMENTS: WHAT'S HIDING UNDER THAT PILE OF PAPER?
Paul Schlauch ^*
Kevin Johnson
Holland & Hart LLP
Denver, Colorado
Andrew Irvine
Holland & Hart LLP
Jackson Hole, Wyoming

PAUL J. SCHLAUCH is with Holland & Hart LLP in Greenwood Village, Colorado. He has more than 35 years experience in legal issues relating to the mining industry. His practice has included counseling regarding operational and regulatory matters and representing clients in a wide array of transactions as well as in litigation and arbitration. Mr. Schlauch has assisted in the structuring and negotiation of hundreds of transactions, including joint ventures, limited liability companies, leases, royalty transfers, mineral property purchases and sales, ore sales agreements, cooperative operating agreements, and corporate acquisitions and mergers. He has worked extensively on public land law issues including matters relating to the location, maintenance and patenting of mining and mill site claims, land exchanges, the acquisition of various property use rights, and the resolution of claim conflicts. In each of 2005, 2006, 2007 and 2008 the International Who's Who of Business Lawyers named Mr. Schlauch as "the World's leading mining lawyer," pointing in particular to his work on international transactions. In 2007 and 2008, Mr. Schlauch was also honored as one of the top 500 lawyers in the United States by Law Dragon. Mr. Schlauch has been active in natural resource industry professional organizations. He is a past president of the Rocky Mountain Mineral Law Foundation and a past President of the International Mining Professionals Society. He is a frequent speaker on topics relating to the mining industry and is the author of numerous articles on industry issues. Mr. Schlauch is an Adjunct Professor of Law at Denver University School of Law, where he teaches courses on international mineral law and policy. He also holds an appointment as an Honorary Lecturer and Course Director on the Faculty of the Center for Energy, Petroleum and Minerals Law and Policy at the University of Dundee, Scotland. Mr. Schlauch is listed in The Best Lawyers in America, Colorado Super Lawyers, The International Who's Who in Business Lawyers, Who's Who in America, Who's Who in American Lawyers, Who's Who in International Business, and the International Who's Who of Mining Lawyers.

KEVIN W. JOHNSON is a Partner at Holland & Hart LLP in Denver. He represents clients in international and domestic business transactions, joint ventures, mergers and acquisitions, financial transactions and corporate law. Having lived and worked in Spain and Switzerland for five years, Mr. Johnson has substantial transactional experience within the European Union and its Member States. In addition, Mr. Johnson has experienced representing clients in Eastern Europe, Latin America, and the Pacific Rim. Mr. Johnson's recent experience includes advising clients in transactions for the purchase of internet companies throughout Europe and Latin America; structuring international operations for clients in Europe and the Pacific Rim; advising an investment fund on the purchase of joint venture companies in China; and structuring a fund to invest in energy efficient projects in Latin America. Mr. Johnson also has advised clients in structuring manufacturing and technology licensing joint ventures throughout the United States, Europe, Asia and Latin America, including developing strategies for governmental filing requirements both in Europe and the United States. Mr. Johnson has experience in structuring and advising start-up companies, particularly in the electronics and other high technologies industries, and in financing transactions for start-up companies. In addition, Mr. Johnson has experience in privatizing state-owned enterprises. Prior to joining Holland & Hart, Mr. Johnson was in-house counsel to a major U.S. multinational company. This experience provided Mr. Johnson with a better understanding of the objectives of businesses when entering into transactions, and an appreciation of the workings of business that come from continual contact with the business represented.

ANDREW A. IRVINE is with the firm of Holland & Hart LLP in Jackson, Wyoming. Mr. Irvine concentrates his practice in natural resources and environmental law, including work in federal and state public land law, environmental regulatory compliance and permitting, minerals, water, and air. He has worked with clients that include water resource providers and members of the natural gas, hydropower, mining, oil, and other industries. Mr. Irvine joined Holland & Hart in 2006, and practiced in the firm's Denver office before moving to the firm's Jackson office in late 2007. Prior to joining Holland & Hart, he held law clerk positions with the Arvada City Attorney's Office, Gold Fields Exploration, Inc., and the Bonneville Power Administration. Mr. Irvine also served as a legal intern for the U.S. Department of Justice, Environment and Natural Resources Division. In addition, Mr. Irvine has held various positions across the country and overseas. He served as a Sea Kayak Ranger with the United States Forest Service in Alaska; an Emergency Wildland Firefighter in Oregon and California; a Physical Science Technician with the National Park Service in Alaska; a paleontology research team member in China and Montana; a hydrogeology consulting team member in Indiana; and a geotechnical research intern in Australia. Mr. Irvine is admitted to practice law in Colorado and Wyoming.

I. Introduction

Due diligence is fundamental to the valuation of the business and assets that form the basis of a transaction and establishes the foundation for the allocation of risk inherent in any transaction between a buyer and a seller or parties contemplating a joint venture. For a seller,¹ the basic functions of due diligence are analysis and disclosure. Due diligence by the seller allows it to review the business and assets subject to a transaction and to provide information to a buyer on the benefits and risks related to the purchase of the business and assets. Properly performed, due diligence puts a seller in a position to avoid inaccurate assertions regarding the business or assets and to defend against claims by a buyer that it was misled. For a buyer,² the basic function of due diligence is validation of the assumptions it has made in negotiating the tentative terms of the agreement. Due diligence properly performed by the buyer allows it to test its assumptions on the value and condition of the business and assets. The result of due diligence by the seller and the buyer should be agreement on the terms of the transaction and the mutually acceptable allocation of risk related to the business and assets, all as set out in the purchase and sale agreement, joint venture agreement or other definitive documentation of the transaction.³

In order to verify the nature and value of a business and its assets, a prospective buyer in conducting due diligence must reach an acceptable level of assurance of the value of the mining

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business that the buyer will be purchasing.⁴ This involves (1) confirming the existence and ownership of the assets of the business and (2) when a merger or acquisition of equity interests is involved, the identification and quantification of liabilities and commitments of the business being acquired.⁵ In order to assure proper disclosure during due diligence, a seller in conducting due diligence must prove the existence and ownership of the assets of the business, identify and minimize liabilities of the business being sold and generally establish to the buyer's satisfaction that the value of the business being sold is worth the price.

A significant portion of the due diligence in a mining transaction consists of confirming the existence and ownership of the assets of the business through a review of documents available on the public record, such as documents relating to title to mineral and surface interests, equipment titles, rights-of-way, water rights, permits and liens and other encumbrances. Due diligence review related to these documents, including mining title due diligence, mining permitting and compliance, and mining surface use and access rights, is covered by other authors at this Institute.⁶ These topics are also addressed in other papers.⁷

In addition to a review of documents available on the public record, it is critical in any due diligence process to identify and quantify the nature and extent of assets, liabilities and commitments related to the business being acquired or sold contained in non-public documents. This requires a detailed review of the various agreements and unrecorded documents material to the mining transaction.⁸ This paper addresses the key issues that should be considered in reviewing the various types of agreements and unrecorded documents that are potentially material to the transaction.⁹

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II. Overview

Mineral property acquisitions frequently involve either the purchase of the target property and associated tangible and intangible personal property or the earning of an interest in the property through an exploration and development joint venture agreement.¹⁰ Because these types of acquisition structures focus primarily on the specific property involved, the range of issues that need to be considered in a due diligence review is limited to those inherent in the acquisition of the property and can generally be addressed through title analysis, and due diligence related to mining permitting and compliance and surface use and access rights.¹¹

When a mix of geographically disbursed mineral properties that constitute all or substantially all of the properties of a company is involved the transaction is often structured as an acquisition of the...