As the demand for commodities continues to push mining companies and their operations into those parts of the world where legal systems are still developing and political regimes can be unstable, it has become increasingly important to obtain the correct legal advice in relation to doing business in the relevant location. Whilst there will be plenty of operational aspects for companies to review when moving into such markets, such as political risk, local partnering, security, insurance, taxation and corporate governance, three of the more fundamental legal issues that mining companies need to put on their checklists are set out below.
Although it is always helpful to engage experienced mining lawyers in more sophisticated legal jurisdictions such as Canada, England or Australia, the requirements to comply with local corporate or mining laws can be essential, and so engaging a good local lawyer is particularly important. Without good title to the relevant mining licences or permits, potential acquirers and financers will have difficulties and indeed a company may have nothing of any value.
Local lawyers should also have intimate knowledge of the key areas of legislation which can easily trip up new market entrants, particularly administrative requirements, regulatory and compliance issues and foreign investment laws. When a mining company’s value can come down to a piece of paper that has been correctly stamped and filed, making sure all these issues have been dealt with correctly is essential.
Not all lawyers in these jurisdictions are equal in terms of expertise or reliability, and may not have the necessary experience to understand the requirements and standards demanded by international mining companies. So the company’s trusted legal advisers should be responsible for finding an appropriate local firm, preferably one with a working relationship with the relevant government departments.
Whilst local knowledge is key to understanding the regime of the jurisdiction where the assets are located, mining companies also need to bear in mind the extra-territorial nature of their own, and other countries’, legislation. The US. Foreign Corruption Practice Act (and the extradition issues that surround it) and the UK Bribery Act will need the attention of the home legal team, as does legislation specifically affecting mining, such as the US Dodd-Frank Act which deals with reporting requirements for companies connected to conflict minerals from the Democratic Republic of Congo and neighbouring countries. International criminal and environmental laws, often based upon universal standards, will also need attention.
Although a company incorporated in the relevant local jurisdiction will inevitably be required to hold the mining permit or licence, the jurisdiction of incorporation of the holding and any intermediate company can also be crucial. Tax will likely be the most important influence on this decision, in particular the income and capital gains tax consequences for the ultimate shareholders and the company, but using a jurisdiction that also enables the company to take advantage of any relevant bilateral investment treaties, commonly known as BITs, is now becoming more important as resource nationalization starts to make more of an impact.
Resource companies are particularly vulnerable business models, given that at each step of exploration through development to production there is a strong expectation, but no obligation, that the host government will approve the next step. There are plenty of examples where governments have changed their minds and decided to keep the resources for themselves — this may not be a straightforward expropriation but rather one of the many other ways to engineer indirect dispossession (non-renewal of licences, etc.). Choosing a holding or intermediate country that has a BIT in place with the local jurisdiction can at least act as deterrent against such action, although in practice, bringing such claims in the international courts can be very time consuming and expensive.
Understanding corporate indigenization laws is also key — Black Economic Empowerment legislation in South Africa can have a dramatic effect on ownership structures. Other examples include the fact that any mining company in Zimbabwe that has assets of more than US$1 must now be held at least 51 per cent by indigenous Zimbabweans. Although this legislation has been singled out for its lack of logic, especially when companies need financing and the local partner cannot afford to invest its share, it shows how difficult governments in developing markets can be when it comes to resource ownership, and the trend is growing.
Another point to bear in mind for the country of incorporation of the holding company will include the practicalities of administration in that country — for example having all the board fly to offshore tax havens, while alluring, can be expensive and require strict adherence to formalities.
Finally mining companies should be aware of the increase in shareholder activism which in some cases can be a backdoor mechanism for taking control of a company. The protection of a good takeover code or legislation can therefore be of real use in such situations, especially when looking to attract institutional shareholders.