Incorporated joint venture
An incorporated joint venture is an association of participants for a separate legal entity to undertake the project on their behalf. It bears the characteristics of any other incorporated entity. Generally, the shareholders agreement is the main type of legal agreement governing this type of joint venture structure. Such an agreement sets out the respective rights, obligations and interests of the participants in the Joint Venture and the joint venture equity is reflected in the percentage of the shares they each hold.
Board directors will be appointed to administer the incorporated joint venture including the company constitution, daily business operations, restrictions on capital raising and pre-emptive rights restricting share transfers. The joint venture participants (shareholders) will receive dividends from the sale of mining product instead of from the product itself. The shareholders agreement will set out the specific terms and conditions in relation to the methods of profit distribution, as well as the business objectives of the joint venture.
The income is taxed at the company rate before it is received by the parties. Profits and losses cannot be offset losses against other income outside of the joint venture.
Unincorporated joint venture
In Australia, the unincorporated joint venture is the most common joint venture structure in the mining and resources industry. The basis of an unincorporated joint venture is the contractual relationship between the joint venture participants. The participants enter into a joint venture agreement and appoint an operator to carry out joint venture activities. The ownership of the joint venture assets is retained by the participants.
The joint venture agreement usually sets out what needs to be contributed by the participants to the joint venture project such as operational funding, property or professional skill. Additionally, such agreements typically set out the objects, term, risk and production allocation, and provide that the participants will be severally liable for all expenses, any liabilities that arise in relation to the joint venture in accordance with their respective interests in the joint venture.
The wording of the joint venture agreement is critical to determine whether fiduciary obligations are imposed on the participants. The joint venture participants should be aware that fiduciary obligations may still arise even if the participants have included some wording to negate the existence of a fiduciary obligation. The particular circumstances of the participants and their relationship with one another will be relevant.
Joint venture participants should also be aware of the important features of the profit sharing arrangements: that is, the participants in an unincorporated joint venture project can only receive their percentage share of the product of the joint venture, rather than a share of the profits of the joint venture. If the participants are interested in sharing the profits, then it is likely the business structure would be a partnership between them, and unless the parties have thought carefully that may trigger unintended consequences like fiduciary duties and various tax consequences.
An unincorporated joint venture has no separate legal identity, thus participants are treated independently for tax purposes. It is important to note that tax deductibility is only available for certain mining expenditure and there is the potential for offsetting tax losses, especially in the early stages of mining, against other assessable income. It is essential for joint venture participants to consider joint venture structures before bidding for a project. Any changes of the structures at a later time could be very difficult, costly and hazardous to the participants.