Perhaps unsurprisingly in recent months we have experienced a sharp increase in queries from clients seeking a quick, easy and low-cost exit from their joint venture arrangements. While this might sound straightforward in theory, there are certain things which should be considered by any joint venture participant contemplating a withdrawal from their joint venture. Although the outcome for participants will depend on the terms of the joint venture agreement in question, this article highlights some of the key issues which might arise for a withdrawing participant.
Procedure to be followed
Whether a participant is able to withdraw from a joint venture will ultimately depend on the terms of the particular joint venture agreement. However, where the joint venture involves an earn-in or sole-funding stage, the right to withdraw during the earn-in or sole-funding stage will often be conditional on the farminee having spent a certain minimum amount on the tenements and/or having met statutory expenditure requirements for the tenement year in which it intends to withdraw.
In the case of an exploration joint venture, where the earn-in has been completed and the participants both hold a percentage interest in the joint venture, it is fairly common for either participant to be entitled to withdraw from the joint venture by providing a certain number of days’ written notice to the other participants. Again, it would not be unusual for the withdrawing participant to be required to meet its share of the statutory expenditure requirements for the tenement year in which it intends to withdraw or to meet its share of the work programme and budget in place at the time of withdrawal.
In contrast, due to the difference in funding requirements between exploration and mining joint ventures, a joint venture agreement governing an operating mining project will often not permit participants to withdraw. If withdrawal is permitted, the withdrawal provisions will often be drafted in such a way that the issue of a withdrawal notice by one participant triggers an option for the remaining participants to also elect to withdraw and, if necessary, wind-up the joint venture. The mining joint venture agreement might also include provisions under which the withdrawing party is required to provide security for any obligations or liabilities arising prior to the date of withdrawal, including rehabilitation and other decommissioning costs.
Resignation as manager
Regardless of whether the withdrawal is from an exploration or mining joint venture, if the withdrawing party is the manager of the joint venture, it may be necessary for the withdrawing party to formally resign as manager.
Again, the procedure for resignation of the manager will depend on the terms of the joint venture agreement. Sometimes the joint venture agreement will provide that a withdrawing participant will automatically cease to be the manager on withdrawal. Where the agreement does not provide for automatic resignation of the manager on withdrawal, the withdrawing participant will have to take active steps to resign as manager. Commonly the agreement will require that the manager give a certain period of notice in writing for the resignation to be effective.
Finally, it is also important for a participant contemplating withdrawing from a joint venture to bear in mind the potential duty consequences of that withdrawal. Transfer duty (being the most common type of “stamp duty”) is levied by each state and territory government and will apply to a wide range of transactions, including the transfer of land or an interest in land such as mining tenements. In this regard, the transfer of an interest in a mining tenement will be dutiable in all states and territories across Australia.
Where a withdrawing participant holds a legal interest in the tenements the subject of the joint venture, a withdrawal will necessarily require the transfer of that interest to the remaining participant(s). The joint venture agreement may go so far as to state that, on withdrawal, the withdrawing participant will be deemed to have assigned or transferred its percentage interest in the joint venture to the remaining participants. The agreement will also often specify which party is responsible for paying the costs (including any duty) associated with a withdrawal. Often, the party responsible for meeting those costs will be the party electing to withdraw from the joint venture. If the agreement is silent in relation to which party will pay the duty calculated on the withdrawal, it will be necessary to look to the applicable legislation in the relevant state or territory.
The position is less clear where the withdrawing participant is yet to earn a legal interest in the joint venture property (for example, during the farm-in or earn-in stage). In this situation it will be necessary to analyse the terms of the applicable duties legislation in the relevant state or territory to determine whether the legislation is sufficiently broad that duty will also be payable on a party’s right to earn a joint venture interest.
On the basis that duty is likely to be payable on withdrawal from a joint venture, the withdrawing participant should consider the likely value of the interest which it is effectively transferring to the remaining participant(s). In all states and territories, duty is calculated on the higher of the consideration (including any assumed liabilities) for, and the unencumbered value of, the dutiable property. As no consideration is payable in the case of a withdrawal and in circumstances where the parties are acting at arm’s length, the relevant stamp duty authority will look to the value of the property being transferred in calculating the duty payable. In most cases involving a withdrawal from a joint venture it can be argued that the value of the property is negligible because the withdrawing party is not receiving any consideration from the withdrawal - it is in effect cutting its losses and exiting from a project which it no longer considers viable. These arguments will, however, be limited where the withdrawing party is receiving some form of consideration or is in receipt of an independent valuation of the tenements which attributes some value to the withdrawing participant’s interest.