Negotiating an overseas property agreement (2)

The author concludes his 2-part article, the first instalment of which described the principal elements of the standard mineral option and joint-venture agreement used in Canada and the U.S.

The second instalment highlights some points of misunderstanding which can arise when trying to implement the same kind of business arrangement in a Latin American country.

The option and joint venture in a Latin American context

The legal structure one ends up using in a Latin American country will depend largely on how, and by whom, the property is presented. If the title to the property is held by a state corporation, there may be a public tender that will dictate how much of a percentage interest the foreign company may own and how the business arrangement will be structured. Alternatively, one may be approached by another mining company which has already signed an agreement to acquire an interest in the property, or by the local owner. In all cases, the first thing to do is retain local legal counsel skilled in mining matters. In addition to conducting a title search, the counsel can provide advice on how to structure the proposed transactions to ensure enforceability. Each country in Latin America is different. Despite having common roots in the civil law system, these nations have separate mining, tax and foreign investment rules, and the most dangerous assumption one can make is that what works in Mexico, for example, will work in Chile or Venezuela, and vice versa. Keeping that caveat in mind, one may proceed to discuss several key issues with one’s local lawyers and tax advisers prior to signing any binding agreements:

* Should one form a local corporation?

— The answer probably will be yes. Although property may be held as tenants in common (“comuneros”) in the civil law system, local mining laws might recognize only one owner, or they might prohibit a non-domiciled foreign company from holding mineral title. Most civil law systems recognize a form of contractual joint venture called “cuenta en participacion,” but it is not the equivalent of the North American style of mining venture and, to my knowledge, is rarely used in the mining industry. And while Argentina, Bolivia and Ecuador expressly recognize a form of contractual joint venture that is suitable for mining ventures, it must be stressed that these countries are exceptions to the general rule.

If one is planning to form a single joint venture, one might opt to hold shares directly in the local corporation. If, however, one desires flexibility in forming multiple joint ventures, one might decide to form a holding company which would, in turn, hold one’s shares in the joint-venture companies.

If we were to form a corporation, the owner, in our example, would contribute title to the property in exchange for its 20% of the equity. This provides limited liability to the operation while ensuring that title is controlled by the local corporation which, in turn, is indirectly controlled by the foreign mining company. If transfer of the concessions requires the prior approval of the ministry of mines (as is true of some concessions granted in Venezuela after 1977), it may be possible for the owner to lease the mineral rights to the corporation pending approval of their transfer by the ministry. Exploration could be funded out of the initial capital contributed by the foreign mining company. As additional funds are needed, the shareholders could provide their proportionate shares (or the foreign mining company could provide them, depending upon the business arrangement among the shareholders). * Can the foreign investor legally own a majority of the equity of the local corporation?

— In some countries, including Chile, Costa Rica, Argentina and Venezuela, 100% foreign ownership is permitted.

In Mexico, prior to the North American Free Trade Agreement, foreign investors were allowed to control directly 49% of the local corporation, and the remaining 51% indirectly through a trust.

The need for a trust disappeared on Dec. 27, 1993, when the Foreign Investment Law was amended, eliminating the 49% restriction. In Brazil, a foreign investor may not own more than 49% of the company’s voting capital. By comparison, a foreign investor in Ecuador may own up to 100%, except in cases where the concession is in an area adjacent to an international border (in which case permission must be obtained by presidential decree issued on the advice of the joint chiefs of staff of the armed forces).

* Can the mine’s production be freely exported and the proceeds from sales kept offshore?

— In Chile, the foreign investor may enter into a Decree-Law 600 Foreign Investment Contract, with the government guaranteeing this right (among others).

In Venezuela, gold must be sold to the central bank. Prior to the adoption of exchange controls on June 27, 1994, the central bank paid the seller a price in bolivars equivalent to the international market price in dollars (translated at the free-market rate of exchange) on the date of the sales transaction. Today, the central bank pays at the controlled market rate and there is not yet a clear mechanism which would allow the seller to buy dollars to remit offshore. The government hopes to be able to eliminate the exchange controls in 1995, and the central bank is studying a government proposal to allow gold exports.

* Should disputes be settled by arbitration or through the local courts? — The answer to this question will depend on the integrity and speed of the local courts and the experience of local judges with mining contracts. If international arbitration is used, check to ensure that the arbitral award can be enforced by the local courts.

* Which law should govern agreements?

— For practical purposes, it does not make much sense to choose a law different from that of the forum in which the suit is most likely to occur. To do so, one would run the risk of losing a lot of time proving to the local judge what the foreign law says, before even getting to the merits of the case. Consequently, it almost always makes sense to use local governing law, because the principal asset of the venture (that is, the mineral property itself) is situated in the host country. And if the dispute relates to the mineral title, it must be resolved by reference to the laws of the host country.

(The above is only a partial list of the questions one should ask local legal and tax advisers. Other factors to take into account are the level of political risk in the host country, and whether one can obtain risk insurance and project financing at a reasonable cost.)

The negotiating process

In my experience, the best negotiating teams are composed of a geologist, a business or finance person, and a lawyer. And it certainly helps if at least one member of the team speaks the language of the host country. In order to avoid getting hopelessly bogged down in details at the outset, one is advised to try to reach agreement on the basic elements of the business arrangement and embody them in a short (3-to-4-page) letter of intent. The letter can then be given to the lawyers for the party with the greatest financial interest at stake (usually the foreign company) to use as a basis to draft a more formal binding agreement or series of agreements enforceable under the laws of the host country. The formal agreements should include, at the very least, a “shareholders agreement,” which will serve as a sort of road map for the parties, and “articles of incorporation” of the local company.

It is at this point that differences tend to arise between the common law-trained lawyer for the foreign mining company and his civil law-trained local counsel, or between them and the lawyer for the host country government or local property owner.

Contracts drafted by lawyers trained in the common law system tend to be lengthy and detailed so as to anticipate every conceivable breach. They usually contain elaborate definitions, representations and warranties, and a lot of standard provisions called “boilerplate.”

By contrast, the Lat
in American lawyer will invariably prefer a shorter document reciting broad statements of principle and will be content to defer questions of what will happen in the event of a breach to the dispute resolution mechanism in the contract, or to the courts.

Such differences can cause contract negotiations to be lengthy, and compromises in drafting technique will be required if a final text is to be acceptable to both sides. These issues are best discussed face to face, rather than by fascimile, and one should expect negotiations to last longer than they generally do in the U.S., Canada or Europe.

— The author is Placer Dome’s country manager in Venezuela. He worked previously in Placer’s legal department and prior to that was an associate at the Caracas office of the international law firm Baker & McKenzie.