CHAPTER 4 ANTITRUST CONSIDERATIONS IN MINERAL EXPLORATION AND EXPLOITATION VENTURES
| Jurisdiction | United States |
(May 1979)
ANTITRUST CONSIDERATIONS IN MINERAL EXPLORATION AND EXPLOITATION VENTURES
Brobeck, Phleger & Harrison Spear Street Tower One Market Plaza
San Francisco, California
Restraint of trade and prevention of improper monopoly practices are the concerns of the United States antitrust laws. Congress considered that the preservation of competition and the prevention of monopolies was a national concern and it reflected this concern in the enactment of the various antitrust laws.1
Monopoly has been defined as:
...when one firm controls all or the bulk of a product's output, and no other firm can enter the market, or expand output, at comparable costs. In such circumstances, the firm has the power to raise prices above competitive levels by restricting its output, because the output reduction cannot be offset by expanding output of others.2
In the mining business, monopoly may occur when two competitors merge to form a single unit, or there may result from such merger a significant lessening of competition. In the exploration side of the mining business, merger or consolidation to form a single ongoing joint corporation seldom occurs. Rather, the usual procedure is for two or more persons to join together in an exploration venture which has as its principal objective the finding of an ore body. Thus, in the exploration aspects of the mining business, the principal focus of the antitrust laws is on the preservation of competition. Because of the almost unbearable risk associated with the task of finding an ore body, mining company managements tend to look for a partner or partners with whom one can share the risks of failure to
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find ore with a concomitant willingness to share the rewards should an ore body be found.
A joint venture has been defined as
...a joint business undertaking of two or more parties who share the risks as well as the profits of the business.3
The courts recognize certain characteristics as common to joint ventures:
1. A common interest in the performance of the joint purposes;
2. The right to exercise control in some fashion in pursuing the purpose;
3. A proprietary interest in the subject matter, if property is involved, joint ownership or right of joint ownership consistent with the interest of the venturers; and
4. Sharing in profits and losses.
Joint ventures may be formed by joint acquisition of a business, by pooling of assets, by the creation of a new joint corporation, or by contract whereby the rights and duties of the venturers are spelled out in a venture agreement without the creation of a new corporation. A joint venture is subject to the prohibitions of the antitrust laws. Thus, in the mining business, exploration goes forward usually with a partner or partners under an agreement which has come to be known as a joint venture agreement. Ordinarily in the United States, exploration projects are not conducted by joint corporations because of the disadvantages associated therewith under the United States federal income tax laws.
I. DOMESTIC EXPLORATION
Assume that the target for an exploration program is a hard rock mineral in an area within the geographical confines of the United States. The number of partners available to participate in sharing the exploration risks of finding the hard rock mineral are as follows:
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A. Another mining company which already understands the risks of exploration and is willing to participate in those risks to explore in the target area. It can be assumed that this mining company can make the necessary financial commitment to the exploration and exploitation of the ore body to the extent necessary to bring it into production. It can also be assumed that this mining company is in a position and is willing to furnish technical skills to the venture, both in the exploration and exploitation areas.
B. A user or potential user of the product is also another possible co-venturer in the exploration. For example, a public utility might be interested in participating in the exploration for uranium or coal. Once again, it can be assumed that the utility has the financial muscle to support exploration and exploitation. It probably has no technical skills to assist in such exploration or exploitation, but it provides a ready-made market for the end product.
C. It is not uncommon for wealthy individuals to form investor syndicates to participate in high risk ventures such as the exploration for minerals. These syndicates of investors form another group which may be partners in the exploration venture. Typically, these syndicates possess the necessary financial capabilities to carry the project at least through the exploration stage and often through the exploitation stage, but otherwise bring no expertise to the venture, nor any interest in participating in operations, and are not interested in using or buying the end product. The principal motivation is tax oriented, since these individuals are in high tax brackets and are willing to take big risks in the hopes of obtaining big rewards.
D. A large corporation which is not presently in mining, but is interested in diversification of its interests and operations is a possible co-venturer in the exploration.
E. The owner or owners of the ground which is the subject of the target area may be interested in becoming equity participants in the venture rather than retaining a royalty or leasehold interest. The owner may be (i) either willing to put up the property as his contribution to the capital of the joint venture with the understanding that the cash required to explore will be furnished by the mining company; or (ii) the owner is in a position and willing to finance his share of the exploration costs.
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F. Finally, many foreign organizations are interested in participating in the search for minerals in the United States. These foreign entities possess the necessary financial capability, may or may not have technical expertise to offer to the venture, and may or may not be interested in using the end product if found and produced.
Each of the above potential venturers must be looked at to determine whether or not there is a violation of the antitrust laws (eliminating competition) in the exploration and exploitation phases of the mining business.
II. JOINT VENTURE CLAUSES WITH ANTITRUST IMPLICATIONS
There are four primary provisions which typically appear in joint venture agreements which must be considered in analyzing the effect of the combination of venturers on competition, and thus its legality or illegality under the antitrust laws of the United States. It has been previously observed that in the United States, exploration projects are generally not conducted by joint corporations — that is, a corporation organized by the exploration venturers who become co-shareholders. This is so because of the disadvantages associated therewith under the United States federal income tax laws.
If the venture is taxed as an association, that is as a corporation, the deductions associated with exploration are taken at that level. If an ore body is found, the deductions may be utilized in the future only against operating earnings which may be so far distant that the deductions, as a practical matter, are also lost forever. Thus, tax planning generally dictates that the exploration venture be conducted by an entity which allows the tax incidents to be passed through to the venturers.
In order for a joint venture not to be taxable as an association (i.e., corporation), the joint venture agreement must not have more corporate characteristics than non-corporate characteristics. In order to obtain a favorable tax ruling in advance of putting the joint venture in operation, the staff of the Internal Revenue Service requires a balance of more non-corporate characteristics than corporate characteristics. The corporate characteristics which the Internal Revenue Code utilizes in determining whether the venture is an association, taxable as a corporation are: centralization of management; continuity of life; limited liability; and free assignability of interests.
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Centralization of management occurs when equity ownership of the venture is divorced from management — that is, when the managers do not have a substantial equity interest in the venture. Continuity of life is associated with continuance of the venture irrespective of what happens to the venturers; it is the perpetual aspect of the corporation. Limited liability occurs when the liability of the venturers is limited to the capital put at risk in the venture. When the venturers are able to freely trade, sell or dispose of their equity positions in the venture, the corporate characteristic of free assignability of interest exists.
A. Take In Kind Clause
Since these characteristics are generally desirable in a joint venture, mining companies have looked for a safe haven to avoid characterization of the venture possessing some or all of the corporate characteristics as an association, taxable as a corporation. Mining companies have found this safe haven in I.T. 39304 which, in essence, provides that if the joint venturers have the right to take any product produced by the venture in kind, the venture will not be taxable as an association. This permits the pass through of the tax incidents of the venture to the...
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