CHAPTER 5 COMMON DEAL STRUCTURES USED IN THE MINING INDUSTRY
| Jurisdiction | United States |
COMMON DEAL STRUCTURES USED IN THE MINING INDUSTRY
Erwin Thompson Faillers
Reno, Nevada
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JEFFREY N. FAILLERS is a partner at Erwin Thompson Faillers in Reno, Nevada. His practice includes business, corporate, real estate, and natural resources law with an emphasis on the representation of natural resources exploration and operating companies. Jeff handles complex transactions and mining-related matters, including property and corporate due diligence; financing; title examination, reports, and legal opinions; business, property, and water right acquisition and disposition; and land-use entitlements. Prior to practicing law, he worked as an independent mineral landman where he assisted clients in the negotiation and acquisition mineral properties throughout the western United States. Jeff currently serves as a trustee for the Rocky Mountain Mineral Law Foundation.
The purpose of this paper is to provide a general overview of the various types of deal structures that are most commonly used in the mining industry. Although such deal structures take many different forms, it is fair to say that most business deals in the mining industry (excluding pure financing transactions) relate to the mineral properties themselves—either the full acquisition and disposition of the mineral property or the granting of certain rights in the mineral property. Accordingly, such transactions may be categorized in one of two different ways. The first category relates to transactions in which the acquiring party obtains control or ownership of the entire mineral property, either by way of an asset sale transaction (i.e., selling the mineral property directly) or an equity sale transaction (i.e., selling the company which holds the mineral property). The second category relates to transactions in which the owner retains an ownership interest in the mineral property, the most common of which include lease agreements and options of various types, as well as joint ventures. Each of these types of common deal structures is discussed below.
I. Transactions in which the Acquiring Party Obtains Control or Ownership of the Entire Mineral Property
As mentioned above, one of the more common deal structures used in the mining industry involves transactions in which the acquiring party obtains control or ownership of the entire mineral property. These types of transactions are typically handled in one of two ways: either by an asset sale transaction or an equity sale transaction. Each of these types of transactions, as well as the advantages and disadvantages between the two choices, are briefly described below.
A. Brief Description of Asset Sale and Equity Sale Transactions
An asset sale transaction, as the name implies, involves the sale of some or all of the owner's assets to the purchaser. In the context of a mining transaction, the sale almost always involves the sale of a real property interest which is effectuated by the negotiation and execution of a purchase and sale agreement with the proposed purchaser. The end result of the transaction is that the purchaser takes full control of the assets subject to the agreement. The purchaser does not acquire the company which owns the assets.
An equity sale transaction, again as the name implies, involves the sale of the equity interests in a target company from the equity holders to the purchaser. Such a sale is effectuated by the parties negotiating and entering into an equity purchase and sale agreement (e.g., a stock purchase agreement for a corporation or a membership interest purchase agreement for a limited liability company) whereby the equity holders of the target company agree to sell, and the proposed purchaser agrees to purchase, all of the issued and outstanding equity held by the equity holders. The end result of an equity sale transaction is that the purchaser takes full control and ownership of the company holding the assets as opposed to the individual assets themselves.
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As described above, an asset sale transaction is distinguishable from an equity sale transaction because an asset sale involves the sale of the individual assets themselves and the seller retains ownership of the company which previously held those assets. Conversely, in an equity sale transaction, the equity holders of the target company sell their ownership interests in the company such that the purchaser takes ownership of the target company and, indirectly, the assets held by that company.
Choosing between an asset sale versus an equity sale is deal specific and requires weighing of the advantages and disadvantages between the two choices as they pertain to the assets being acquired. The main advantages and disadvantages are described below.
B. Advantages and Disadvantages of Asset Sales and Equity Sale Transactions
The most commonly considered advantages and disadvantages between an asset sale and an equity sale transaction are summarized as follows: (1) legacy liability concerns; (2) due diligence procedures; (3) closing procedures; and (4) preemptive right issues. Each of these issues is briefly discussed below.
1. Legacy Liability Concerns
Among the most important considerations when choosing between an asset sale or equity sale transaction are the liabilities that will be transferred to the prospective purchaser. In an equity sale transaction, the purchaser will take ownership of the entity and its legacy liability issues, including, but not limited to, environmental claims, employment claims, federal income tax issues or liabilities, and known, threatened, and unknown tort claims. However, in an asset sale transaction, the parties have flexibility as to which assets and liabilities are subject to the transaction, allowing the purchaser to reduce its risk of assuming unknown liabilities of the seller.
The potential for legacy liability issues is the primary reason sellers commonly prefer an equity sale over an asset sale transaction and, naturally, why purchasers commonly prefer an asset purchase over an equity sale transaction.
2. Required Due Diligence Procedures
The due diligence required in connection with an asset sale transaction is focused on the assets themselves. This requires due diligence on the real property being acquired (e.g., environmental review, title review, permit review, review of lease agreements, etc.). However, due to the nature of an equity...
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