CHAPTER 11 JOINT VENTURE TRANSACTIONS AND ISSUES IN LATIN AMERICA
| Jurisdiction | Derecho Internacional |
(Nov 1997)
JOINT VENTURE TRANSACTIONS AND ISSUES IN LATIN AMERICA
Paul J. Schlauch
Holland & Hart
Denver, Colorado
Panelists
Britt D. Banks
Newmont Gold Company
Denver, Colorado
Patrick J. Garver
Barrick Gold Corporation
Toronto, Ontario, Canada
Alberto Orrego
Urenda, Rencoret, Orrego y Dorr
Santiago, Chile
Jorge Paz D.
Horowitz y Romoleroux
Quito, Ecuador
Jorge Streeter P.
Claro y Compania
Santiago, Chile
George G. Ventura
Parsons Behle & Latimer
Salt Lake City, Utah
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Transcript of the Panel on Joint Venture Transactions and Issues in Latin America
1. Choice of Business Entity.
One difficult decision the parties face early on in their negotiations is the type of business structure which should be employed. Should it be on-shore or off-shore? A corporation, a partnership, joint venture or other form of arrangement? Does local law provide a special form for the mining business? The choice of form of the business arrangement will be impacted by domestic and foreign tax laws and by the foreign investment laws and may be effected by a myriad of other considerations in the particular context of any particular transaction.
Question:
By Mr. Ventura: Is it possible to have the entities or the parties' relationship established through the creation of an off-shore entity?
Response:
By Mr. Paz: The creation of the entity is the most important starting point on any business. Its selection depends on the kind of deal you are trying to put together, the parties and the country. The parties may try to use some kind of off-shore agreement with an off-shore company opening a branch in the country where the mining venture is going to take place. But, off-shore agreements are often difficult to negotiate with local people. Successful use of this approach will depend on the skill of the parties, how knowledgeable they are on the business, and more importantly, on the requirements of the local law concerning the operation of local branches. Even though the use of off-shore arrangements is a useful alternative, there are often requirements, such as limitations on property ownership, that will prevent foreign branches of mining companies form effectively
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operating in a country. This brings us to the forms of business arrangements available under local law or corporate law. Chile has a vast experience with the typical joint venture—just on the simple contractual basis. However, that type of joint venture is not recognized in most of the countries in Latin America. Even where the use of a joint venture is possible, its use presents a number of questions that prevent many mining companies from using the most simple joint venture form. Therefore, for at least the generality of the cases, we will be constricted to use one of the forms established by the local corporate law. Most often that involves focusing on a sociedad anomina or a sociedad de responsibilidad limitada incorporated in the country where the mining property is located.
By Mr. Streeter: In many years working with joint ventures, I have come to the conclusion that the joint venture itself is not a contract, such as a contract of sale or a contract of lease; it's really a transaction or operation which may take very many different legal forms. Under the Chilean law, some of the forms can be corporate forms. Some other forms can be very formal contracts regulated by the mining code. Another instance is joint ventures which are simply the contractual type, as is the case in the common law countries. There are many examples available to illustrate this. First of all, one of the two major Chilean state companies in mining uses the contractual mining company. In that sense we are extremely fortunate in Chile to have had for many, many years a very good set up of mining companies. Secondly, we can have, and this is what the other major mining company does, a simple agreement by the parties whereby the parties set out their rights and obligations and add to that agreement the mutual promise to form a corporate entity if the investor has earned its percentage of the property. Or you can have another form which does not use a corporate structure at all. If investors in a property can take an option to buy or an option to purchase a certain percentage in the mining property itself. Alternatively, the vendor or the holder of the property could make a unilateral and binding promise to sell a portion of the property to the investor. These are just a few of the forms available. Therefore, if a foreign mining company wants to have a common-law type joint venture in Chile, we would have to look quite a bit into the details of this structure because there are at least five or six different forms which this can take and which would suit one of them more, others less, for this particular type of transaction he wants to make. In many years with mining ventures, I have used no less than six or seven different contractual forms to embody relationships within the parties. And that type of flexibility, I think that is something that the investors value very highly.
Question:
By Mr. Ventura: Would you explain the nature of the Chilean contractual mining company you mentioned?
Response:
By Mr. Streeter: Chilean mining law does not like the joint ownership of mining concessions, and therefore if two or more persons have a joint interest in a mining concession by operation of law, a company is formed. Since there is not an agreement of
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the parties before the company is formed, the law says what the agreement of the parties is like. But there is also a provision that says the parties can freely make their own agreement for the governance of the company, subject basically to the same rules, and with only two fundamental things that have to be complied with: (1) the basic requirement of Chilean company law of two or more shareholders and (2) that this company has to have in its assets from day one a mining concession.
Question:
Would you please comment on the type of structure that could be used in countries other than Chile?
Response:
By Mr. Streeter: If the venture is going to take place outside of Chile, we are probably going to be limited to either using a S.A. or S.R.L. Certainly, I will say that first of all we have to be very careful on the extent of the concept of S.A. and S.R.L. in the different countries. We all use pretty much the same language for the same companies, but in nature they vary from country to country. Generally, you can call the S.A. a proper vehicle for a public company—free trading shares, open capital—very few limitations except those imposed by its actual bylaws. However, a S.R.L. pretty much follows close a corporation form. It is a partnership of known people, it's not open, it's just closed for those partners who started the company, very restrictive on different countries and very restrictive on the form of taking decisions and especially on the size of capital. In many countries, that is the main problem of a S.R.L. When the S.R.L. reaches a certain high capital or large amount of assets or a large amount of shareholders, by law it must be converted into a S.A. That is something that needs to be looked at carefully in the different countries. This, I think, is the main difference between the two. But on top of that, a S.R.L. generally has fewer restrictions in terms of administration. They do not require a board of directors generally. They are more simple to administer in countries where they are subject to scrutiny by governmental agencies. They have less intervention participation by the government. Both the S.A. and the S.R.L. are interesting forms, but I think the final selection of a form will need to consider the administration of the decisions as well as on how do you want to have the freedom to transfer your rights. That is the most important thing because limitada bylaws, in most of all the countries in Latin America, require unanimous decision to transfer the rights of the shareholder. So, I think, only by looking into the details of the country and the transaction can the final decision on this matter be reached.
Comment:
By Mr. Ventura: Just a very short point on this issue. Tax questions are, of course, extremely technical. You have to look at the taxes in the country where the investment is coming from, probably the taxes at the middle ground tax haven where you are setting up a company, and the taxes locally. But, although tax considerations may be crucial, they should not deform your contractual structure. The important thing is for the parties to have a set of rules determining what they can and cannot do and that set of rules
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should be a simple solution to their problems. If we twist things around to get a more favorable tax treatment, we may end up with no joint venture whatsoever. So, lets be extremely careful about that. Once again, taxes are very important, but the deal is more important than the taxation of the deal.
Question:
By Mr. Ventura: Another concern is who owns the mining concessions as we are earning an interest. We are going to be contributing money, the local company has the mining concessions, but if we are contributing a lot of money, we want to make sure that these mining concessions, at some point, are going to get into our hands. How can we protect our interests and gain title to the concessions, if, in the interim as we are earning, the local company goes bankrupt?
Response:
By Mr. Streeter: We once again have a tremendous responsibility in where to place ownership of the mining property. Many times, it of course remains with the vendor. If you are doing a deal with a very senior and large mining company in Chile, it will not want to dispose of the property before the interest has been really earned by the investor. But, in other cases, we can place the...
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