Form Over Substance: Structuring a Mining Joint Venture
2018 has seen a marked uptick in the use of the mining joint venture (JV) in the industry as mining companies spend more on exploration and look for strategic partners to invest in expanding projects. While the jurisdiction in which the JV will be based is the main driver for determining what kind of JV structure is available to the potential JV partners, some jurisdictions, like Canada, provide several attractive choices.
Mining JVs in Canada tend to take one of the following forms:
- an unincorporated joint venture;
- an incorporated joint venture; or
- a limited partnership.
Choosing an available form of JV is often a function of several factors, including:
- ease and cost of initial setup;
- tax considerations – tax considerations are, as discussed below, a significant driver for type of JV vehicle; and
- liability and bankruptcy concerns – some JV structures provide more protection to the JV partners than others in the case of the bankruptcy of a JV partner and this may be a driving force if a JV partner is not financially strong.
Unincorporated Joint Ventures
An unincorporated JV is the simplest, quickest and usually cheapest form of JV structure; it is a creature of contract, where the JV agreement governs all aspects of the project and the relationship between the JV partners. The ownership structure relies on the shared undivided beneficial interests of each JV partner in the JV assets (with legal title either held by one JV partner or by a mutually held title company). Practically, this means that if an aspect of the JV relationship is not set out in the JV agreement, the parties cannot rely on corporate law or common law to fill in a gap and a dispute is more likely. On the flip side, the free-form nature of the unincorporated JV can also be an advantage, since it gives the parties the greatest contractual freedom to define their relationship and how the JV will operate.
A significant concern for those considering an unincorporated JV is the impact of the bankruptcy of one of the JV partners. Even with protections built into the JV agreement there is a risk that the JV assets or even the other JV partners can be sucked into the bankruptcy proceedings and a motived bankruptcy court may disregard the JV agreement altogether. Another concern under the unincorporated form is the possibility that in some circumstances the JV partners may be held to be jointly and severally liable with respect to third party liability. From a tax perspective, this form of JV is simplest, as, generally speaking, each JV partner is taxed directly on its JV income and the losses from operations flow directly to the JV Partners; however, as an unincorporated JV results in the JV partners effectively owning a direct interest in the project assets, there can be certain tax implications of any changes to the proportionate interests of the JV partners in the JV, including if a new JV partner is introduced, as any such change could result in a disposition of the underlying project assets by one or more JV partners.
Generally, an unincorporated JV is most suited to early stage exploration projects. While this form can be made to work in a development and/or production scenario, in those cases parties may be better served adopting one of the other structures.
Incorporated Joint Ventures
The incorporated JV form requires the incorporation of a separate company that will serve as the main JV vehicle, will likely own all of the project assets and may operate the project on a day to day basis (using a management team made up of secondees of one or more of the JV participants). Each JV partner will be a shareholder of the JV company and the JV agreement will need to comply with the terms of the relevant corporate statute in the jurisdiction where the JV company is incorporated.
As a result, some of the contractual freedom that is an attraction of the unincorporated model is constrained. For example, for an Ontario or federal JV company (but not certain other provinces) the board will need to comply with director residency requirements of the relevant corporate statute are met. Directors appointed by the JV partner shareholders may also have difficulty in reconciling the duties of directors with the interests of the appointing shareholder.
The incorporated JV is attractive from a liability perspective as liability should be limited to the JV company rather than attaching to the shareholders. The corporate form may also be attractive where the interests of the JV partners are not expected to be fully aligned, since corporate rules will generally make it simpler to deal with disagreements between shareholder (although this may be eroded by minority protections under corporate law in some cases).
One of the biggest drawbacks of an incorporated JV is that it will result in a degree of tax inefficiency as the JV company will be subject to tax separately from the shareholders and any tax losses are likely to be locked into the JV company and will not be available to JV partners to apply to offset gains from other operations (although appropriate tax planning may overcome this concern to some degree).
A limited partnership based JV is a hybrid approach that is purely a creature of statute dependent on the terms of the relevant partnership legislation governing the jurisdiction where the partnership is formed. While it is probably the most complicated and expensive to set up (requiring a fulsome limited partnership agreement and often a separate shareholders agreement governing the general partner), when properly structured it can offer similar flexibility and tax benefits to an unincorporated JV while ameliorating some of the drawbacks present in the incorporated form but still providing limited liability protection.
A limited partnership will be consist of a general partner and at least one limited partner. So long as limited partners do not partake in the active management of the limited partnership, their liability will be limited to their contributed capital (while the general partner will have unlimited liability). In practice, the general partner will often be a corporation and the limited partners the sole shareholders of the general partner, who will appoint the board of directors of the general partner. From a tax perspective, the significant advantage of the limited partnership form is that it is treated as a pass-through entity for tax purposes, with profits and losses flowing through to the partners. Thus this structure lets the JV partners have the benefits of limited liability (as in the incorporated model) while also allowing for a more effective tax setup.
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