STRUCTURING THE DEAL

• Jurisdiction: United States

International Resources Law and Projects
(Apr 1999)
CHAPTER 2A
STRUCTURING THE DEAL
Barry S. Lewin ^*
North Limited
Melbourne, Victoria, Australia

Introduction

As we all know, participants in a major resource joint venture are faced with any number of permutations and combinations of structural alternatives when negotiating the deal. Although at the first order of importance the choices are fairly stark — incorporated or unincorporated, partnership or several liability — the range of possibilities increases greatly as one begins to come to grips with the detail. Even at this lower level, however, there are a number of common issues and typical strategies for dealing with them. Restrictions on transfer, dispute resolution, separation of management and shareholder rights and "sole risk" will often prove to be hot topics in joint venture negotiations.

In this paper, I would like to examine the topic of exit strategies. I have addressed this aspect because, in my experience, insufficient attention is given to it in the thrill of the chase during the course of the acquisition process and, apart from the recurring headaches which can result, significant commercial disadvantage can follow where exit strategies have not been thought through.

It is often said of successful entrepreneurs that they always structure their deals to leave open as many possible options at any point in time.

We large mining companies are generally asset operators rather than asset traders. Our mentality is therefore to hold on to our assets and not to consider them in terms of possible on-sale at the time of entry. This mindset works to our detriment.

I should say from the outset that my discussion of this topic will not be "scholarly" or theoretical — the practical "real world" issues raised in this brief paper simply don't lend themselves to that kind of subtle analysis. Rather, I wish to relate briefly my own thoughts and suggestions based on personal experience. I would also not want to suggest that my thoughts or experiences are particularly unique or original in this regard — what I say will undoubtedly sound familiar to experienced practitioners in the area. However, I do hope that it will help others to crystallise their thoughts and develop some of these ideas further.

[Page 2A-2]

Exit Strategies

In the initial excitement of "doing the deal," broaching the subject of exit strategies can be a little like asking one's intended to sign a pre-nuptial. But by the same token, taking the marriage metaphor a little further, the consequences of turning a blind eye can be as devastating as the acrimonious divorce in the long run. I am sure that anybody who has lived through a program of non core divestments will agree with me.

Some of the reasons why unscrambling the omelette can be difficult include:

• Pre-emptive rights and consents under the joint venture agreement;

• Lenders' consents for project financing or a result of ratios contained in the respective joint venturers' corporate lending facilities;

• The need to obtain local approvals, including foreign investment approval;

• Adverse tax consequences, such as crystallising capital gains;

• Commercial/economic conditions.

In my view, the...