CHAPTER 8 THE EVOLUTION OF THE URANIUM JOINT VENTURE
| Jurisdiction | United States |
(Nov 1976)
THE EVOLUTION OF THE URANIUM JOINT VENTURE
Roath & Brega, P.C. Professor of Law
University of Denver
Introduction
Joint ventures are used widely in connection with the exploitation of mineral properties including uranium properties. Utilization of "joint ventures" is motivated in large part by tax considerations and the flexibility, including tax flexibility, of joint venture arrangements. As will appear momentarily, this paper uses the term "joint venture" loosely to reflect a number of different arrangements, some of which have different legal consequences and tax implications. However, we do not explore in this paper tax implications, a subject on which there exists an extensive literature,1 or the implications of the particular format employed, a subject upon which much printer's ink has also been spilled.2 Rather we concentrate on the economic realities of the venture in order to anticipate the basic problems that will be encountered so as to permit legislating by contract how the problems are to be handled as between the parties. We should recognize, however, that if the venture is successful so that its life extends over a period of time and over a sequence of exploitation phases that we are not going to anticipate all of the problems and even as to many of the problems anticipated, we may not provide an adequate solution. We are dealing with a status or relationship rather than a specific transaction and like a marriage relationship if it is to endure it will require good faith and adjustments over the years and it will have to be strong enough to withstand inevitable frictions and squabbles. Nonetheless, if this paper accomplishes its objectives, it will become apparent that there is a constructive role to be played by counsel in the negotiating process and in setting forth the venture's charter in the basic joint venture agreement.
To the dismay of the purists we use the term "joint venture" to embrace a number of different legal relationships emphasizing what they have in common despite the fact that the niceties of form can to a degree control legal results, including tax results,
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and must be taken into account in planning the venture. In fact, if a particular characterization is sought for a particular reason, the agreement may studiously avoid referring to the arrangement as a "joint venture." Our objective is to concentrate our attention on some common problems that will exist irrespective of whether the agreement refers to the venture as a joint venture or studiously avoids such term and suggest drafting solutions to these problems. The problems discussed in this paper have to be anticipated by the venture notwithstanding the fact that the venture may take any of the following forms:
1. The formal partnership deliberately structured so as to be a partnership organized as such under the partnership law of the appropriate state. Unlike a corporation or even a limited partnership, such organization requires a minimum of formality with no filing being made with the state (except perhaps under a trade name statute). A partnership is defined by the Uniform Partnership Act as "an association of two or more persons to carry on, as co-owners, a business for profit."
2. A co-ownership arrangement structured as a joint venture. It may, in fact, discover that many courts will treat it as a "partnership" but of more limited scope.
3. A co-ownership arrangement with an operating agreement in which the parties deliberately disclaim any partnership or joint venture arrangement.
4. A leasing arrangement structured unlike the typical lease so as to achieve results similar to a joint venture. Thus, the lessee may delegate the operating functions to the "lessor" and the "lessor" may receive its share of production in kind.
5. A contract for sale of concentrates. If the properties are still in the exploration stage the commitment to sell concentrates obviously has to be conditional. Even if, however, the commitment to sell is a firm one, the purchaser through prepayments may play a role not unlike that of a joint venturer and may insist on an active participation in planning the project and placing it into production.
6. Primarily to be exhaustive, a "mining partnership." Parties ordinarily attempt to avoid classification as a mining partnership which, among other things, vests control in a majority by interest in the partnership. If a deliberate decision is made to function as a "partnership" the agreement should specify that the venture is a general partnership organized under the specified partnership law of the applicable jurisdiction.
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7. Also in the interest of being exhaustive, a "limited partnership." However, limited partnership arrangements are not discussed in this paper.
The common characteristics and problems include the following:
(1) A sharing of the fruits of the venture on a specified basis either as profits or in kind.
(2) A sharing of the risks of the venture on a specified or implicit basis.
(3) Contributions to the venture — very often but not universally primarily properties by one party and contributions in the form of cash by the other. After a designated stage is reached both parties may be obligated to contribute cash.
(4) The management structure — one of the parties typically being vested with authority to carry on operations and the other party participating within limitations varying at one extreme from the right to dictate to merely the right to be consulted.
(5) Planning for and funding exploration, development and production.
(6) Disposition of the product — ore or concentrates.
(7) The timing and scope of activities — particularly, the timing for placing properties into production.
The Initial Exploration Period
A joint venture may come into being under widely different circumstances. However, to illustrate the whole spectrum of the problems likely to be encountered this paper assumes a joint venture formed prior to establishing significant uranium reserves. In many instances, A Company with exploration prospects and expertise joins with B Company, a better capitalized entity which is expected to fund at least the initial stages of the venture. Hereafter we employ the terms A Company (or Company A) and B Company (Company B) with the foregoing connotations. An initial consideration is typically the interest to be retained by A Company and the interest to be acquired by B Company in return for its investment. At this stage if significant reserves have not been established, B Company undoubtedly wants the alternative of limiting its investment at various points in time dependent upon exploration results. One method of accomplishing this
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result is to provide for a series of phases involving the contribution of specified amounts at the beginning of each phase. Thus, B Company commits itself only to make the initial contribution in return for a specified interest, but has the right to elect to go forward with additional phases at the end of which for specified contributions it acquires an increasing interest in the joint venture properties. Let us refer to this series of phases as the Initial Exploration Period for convenience and assume the following:
| B Company's Contribution | B Company's Interest | A Company's Interest | |
| First Phase | $1,000,000 | 25% | 75% |
| Second Phase | $1,000,000 | 40% | 60% |
| Third Phase | $1,000,000 | 55% | 45% |
| Fourth Phase | $1,000,000 | 65% | 35% |
| Fifth Phase | $1,000,000 | 75% | 25% |
Phases can be by specified periods such as contract years or can depend simply on the expenditure of the monies so once expended a phase ends. The agreement must, of course, specify how the monies are to be utilized. In most events, "Maintenance Costs" will be an appropriate use of such monies, maintenance costs being defined to include assessment work, lease rentals, minimum royalties, surface damage payments and the like. Beyond that monies are to be used for exploration and overhead; perhaps, for further land acquisition, a matter discussed below, and for management fees.
The Plan and Budget
The agreement will ordinarily specify which of the parties is to perform the functions of Operator and the circumstances under which such party may be replaced as Operator. Assuming that A is to perform the functions of the "Operator," by whatever name or designation, there must be a mechanism for planning the program, authorizing generally the expenditures, implementing the program and periodically reviewing the program. A Plan and Budget procedure is a common and useful technique for this purpose. In many instances the Plan and Budget for the first phase may be attached to and part of the initial agreement. In any event a mechanism for adopting future Plans and Budgets must be included in the agreement. Assuming that Company A as the Operator has the initial responsibility for proposing the Plan and Budget, as a minimum, provision will be made for review by Company B. If the parties can agree on a Plan and Budget, of course, no problems are presented. If the parties cannot agree then under the circumstances the "Golden Rule" is likely to prevail — "he who has
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the gold rules" — that is, the party contributing the capital is likely to have the right to make a final determination as to the content of the Plan and Budget so long as it is contributing all or substantially all of the capital.
The Plan and Budget is prepared in sufficient detail to prescribe the expenditures to be undertaken thereunder particularly with respect to a proposed exploration program. It may in fact be fairly explicit in terms of not only the amount of drilling but as to the specific areas in which the drilling is to be undertaken. Since it may cover a fairly extensive period of time such as a contract year there is generally need for periodic review...
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