CHAPTER 19 STRUCTURING THE INVESTMENT FOR MINERAL DEVELOPMENT DESIGNING THE INVESTMENT VEHICLE: MINING
| Jurisdiction | United States |
(Feb 1991)
STRUCTURING THE INVESTMENT FOR MINERAL DEVELOPMENT DESIGNING THE INVESTMENT VEHICLE: MINING
Mallesons Stephen Jaques
New York, New York
I. INTRODUCTION
A. Hypothetical Facts
Exploration work and feasibility studies have established the existence of a large commercial orebody in Australia capable of supporting a long term mining and refining operation. The project will comprise a minesite providing 3 million tons of ore each year, a refinery to process the ore into 1 million tons of product each year, port facilities for the export of product and the import of raw materials, transport facilities to carry the ore from the minesite to the refinery and the product and raw materials between the refinery and the port. The initial capital cost estimate for the project is US$1 billion.
The present owners include an Australian exploration company which wants to sell out and a substantial Australian mining company which wishes to continue. In the light of foreign investment restrictions it is proposed that another Australian mining company be invited to join the project to ensure 50% Australian equity. Because of the need for overseas capital, overseas buyers for the product and overseas refining and operational expertise, it is also proposed that a minor part of the remaining equity be offered to a Japanese user and a major part to a United States user with extensive experience in similar projects.
The United States corporation requires advice on the possible alternative structures under Australian law to give it the best practical blend of advantages from the point of view of taxation, liability and risk, management and control, security of the project and likely project financing.
B. Possible Structures
There are four commonly perceived alternatives —
(a) a company may be formed to own and operate the project in its own right, with the participants owning shares or stock in the company in appropriate ratios and taking their return by way of dividends and/or interest on loans (this structure being sometimes referred to as an incorporated joint venture);
(b) a unit trust may be set up under which a company trustee would be incorporated to hold and operate the project on behalf of the participants as beneficiaries, with the participants holding units under the trust deed in appropriate ratios and taking their return by way of trust distributions and/or interest on loans;
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(c) a partnership may be entered into in which the project would become a partnership asset, with the participants being entitled to partnership shares in appropriate ratios and taking their return by way of partnership profits;
(d) an unincorporated (contractual) joint venture may be established by contract between the participants under which the participants would own the project in their own right beneficially and legally (of record) as tenants in common in appropriate ratios and taking their return in the form of their respective shares of the actual physical product from the project, which would be operated by a manager on their behalf.
I will describe and examine the main features, advantages and disadvantages of these alternative structures in relation to the project.
Before doing that I would observe that some authors might also include a tolling company structure in the list of alternatives for joint ventures. However, this is never relevant to a purely mining operation and is rare in relation to mining and primary processing operations. It is encountered with more frequency in relation to secondary processing enterprises.1
II. COMPANY
A. Basic Structure
As mentioned above, the basic structure would be for the project participants, which may be either substantial corporations themselves or specially formed (domestic or foreign) subsidiaries, to arrange for the formation of a company or corporation to own and operate the project assets and conduct the business of mining, refining and selling on its own account the mineral in question.
The participants would hold shares in the company and receive income by way of dividends. By virtue of being shareholders, they would be parties to the company's constitution, which would reflect corporate arrangements between them. More importantly they would enter into a shareholders agreement which would set out all the detailed provisions as to the project to be created, how it is to be run, the responsibilities of the parties, funding, corporate policy and most of the other matters which one would expect to see dealt with by project agreements in an unincorporated joint venture. These are set out in more detail in the schedule.
The constitution of the company would be tailored to reflect the provisions of the shareholders agreement particularly in respect of different classes of shares, restrictions on transfers of shares, the appointment and removal of directors and the distribution of profits and, if applicable, capital.
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The most important document will be the shareholders agreement, not only because it will cover an array of matters not covered by the constitution of the company but also because the provisions of the constitution will generally be overridden by a unanimous agreement of all the shareholders2 , subject only to the application of mandatory statutory rules.
While it would be possible to use a company or corporation formed outside Australia as the joint venture vehicle, one would normally use a domestically incorporated one to ensure that the same system of law would govern the constitution and corporate affairs of the company, the project agreements and the joint venture property, thereby avoiding conflict of laws complications.
A domestic company is formed under the companies legislation3 and for present purposes would normally be a company limited by shares4 . Such a company is organised on the following principles —
(a) the company has a share capital of a stated amount divided into shares of fixed amount;
(b) it may allot any number of shares beyond a prescribed minimum and up to a stated amount as it thinks fit;
(c) each member is allotted one or more shares on terms that the member will pay the amount of each share; and
(d) the liability of each member is limited to the amount (if any) remaining unpaid on that member's shares5 .
As the company would only be likely to have the consortium as its members and will not be raising money from the public at large, it would usually be incorporated as a proprietary, rather than public, company. To this end its constitution must contain provisions —
(a) restricting the right to transfer shares (usually by making the transfer subject to the approval of the directors);
(b) limiting the number of members to 50; and
(c) prohibiting invitations to the public for, or offers to the public to accept, subscriptions for shares or debentures or deposits of money6 .
A proprietary company requires a minimum of 2 members and 2 directors, as opposed to 5 and 3 respectively for a public company. Certain overriding provisions of the companies legislation applicable to public companies do not apply7 .
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A company is a separate legal personality, with perpetual succession, capable of acquiring, holding and disposing of property and of suing and being sued in its own name. It also has a common seal which is used for effecting corporate execution of documents. It can perform all the functions of a body corporate8 .
It is managed and controlled by a board of directors9 , who in turn are usually appointed and removed by the shareholders in accordance with the company's constitution.
A shareholder, does not, by virtue of that position alone, stand in a fiduciary relationship to the company or the other shareholders. On the other hand a director is extensively obliged as a fiduciary to the company and shareholders10 and, in the case of insolvency, impending insolvency or a proposed transaction which would cause insolvency, to creditors of the company11 .
A director also has statutory duties to act honestly and with reasonable care and diligence12 and to declare personal interests and conflicts of interest13 .
B. Liability
The liability of the joint venture company to third parties is unlimited, save to the extent it is limited by private contract. All its assets, which would include the project assets, will be available to satisfy creditors.
Generally, the liability of the participants to third party creditors of the joint venture company will ultimately be limited to the amount (if any) unpaid on their shares. As there would normally be little reason to issue partly paid shares, the shares would rarely be other than fully paid so that no further liability would attach to them.
The participants could, however, be responsible for liabilities incurred by the company in some cases —
(a) if special circumstances justified a finding that, in respect of the liability in question, the joint venture company had been acting as the agent of the participants — a finding that would be uncommon where it owns and operates the assets and business on its own account;
(b) if special circumstances warranted a conclusion that the corporate veil should be lifted — a conclusion that is not readily reached under Australian law14 ;
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(c) if contractual arrangements between the participants on the one hand and the company on the other entitle the company to reimbursement or indemnification in respect of the liability — an unlikely situation in most cases, as funding obligations would normally be contained only in the shareholders agreement to which the company is not a party.
C. Management Structure
The management structure will, as a minimum, consist of the internal management structure of the company, namely a board of directors, a secretary and such executive...
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