The unincorporated joint venture structure is a fundamental part of the resources sector landscape. We untangle the key traps in stepping into them.
Mining and resources projects are often carried out in joint venture (JV). The long term nature of these projects, large capex outlays a long time before any cash generation (or even an assurance of profitability), ESG concerns and volatility in commodity prices, combine to make the sharing of both risk and reward attractive. JV participants also bring different skillsets and opportunities to the table, ranging from strong track records in obtaining finance and project development, to relevant technical or sales and marketing expertise.
Unincorporated JVs (UJVs) are a key structure used in the Australian resources sector. UJVs are contractual arrangements which allow individual UJV “participants” to share in the “product” (as distinct from the “profit”) of the venture. This structure is particularly suited to mining and resources projects as in theory the product from the mine can be appropriated by each individual participant and taken or sold into the commodities market, allowing each individual participant to account for its own profit.
This means that financial sponsors will often need to form or step into existing JV arrangements when investing in resources projects. The UJV structure in particular, and lack of an interposed JV company, brings with it both unique opportunities and challenges.
Incorporated JV structure
In an incorporated JV or multi-shareholder investment company, the JV parties hold shares in a JV company which owns the project assets. The JV company has its own distinct legal personality. Each JV party takes a return from the project via dividends or other distributions, or repayment of shareholder debt, by the JV company, either periodically or on an exit.
Unincorporated JV structure
UJVs do not have an interposed JV company with a separate legal personality. In addition to each individual UJV participant taking its individual share in the product of the project, each participant holds the project assets as tenants in common in proportion to their “participating interest” or “individual share” (usually expressed as a percentage). Key project assets (for example, mining leases and land) are typically held directly by the participants in their individual shares. Other project assets may be held by a JV manager or operator (which may be one of the participants or its affiliate, or a separate entity owned by the participants in their individual shares) as agent for the participants in their individual shares. The JV manager or operator is responsible for the day to day project operations, with certain matters reserved to a management committee comprised of representatives of the participants or the participants themselves.
UJVs offer flexibility in a number of areas, including:
- Structure and governance: each participant’s rights and obligations are as defined in the bespoke UJV agreement. The UJV agreement can be tailored to take into account a participant’s individual requirements. Participants may also adopt different investment structures to hold their participating interest. Fiduciary duties do not automatically apply between participants (as would be the case for a partnership) and directors’ duties and statutory reporting and audit requirements do not apply to the UJV (as would be the case for a company).
- Allocation of risk / liability: each participant is directly and severally liable for its proportionate share of costs and liabilities of the JV operations. Each participant typically grants to each other participant a first ranking security interest over its participating interest to secure its obligations under the UJV agreement.
- Finance and accounting: the UJV is not a separate legal entity for accounting or tax purposes, nor is it taxed as a partnership. As such, each participant may account for its individual share of production only. Where a participant is 100% owned, it may benefit from consolidation, with its individual share of losses and allowable capital expenditure in respect of the UJV available to its broader corporate group. As noted above, statutory reporting and audit requirements do not apply to the UJV itself. In addition, each participant can arrange its own debt or equity financing (depending on its circumstances) and grant security over its own participating interest (subject to the first ranking security in favour of the other participants).
However, there are potential traps which need to be considered when stepping into a UJV arrangement and carefully dealt with in the UJV documentation, including:
- Less regulated legal structure: the flip side of the additional flexibility offered by a UJV structure is that it typically results in a less regulated legal structure. For example, monitoring of the other participant’s activities may be more difficult than under traditional company structures. The UJV documentation can be complex in comparison with other structures and needs to be carefully drafted to ensure that the UJV is not considered a partnership at law.
- Complexity of business: the Manager typically enters into commitments with third parties as agent for the participants severally in their individual shares. Otherwise, dealings would need to be entered into in the name of each participant. In practice, commercial arrangements (for example, supplier standard terms and conditions) are often not expressly structured in this way, which may lead to complexity when needing to deal with those arrangements over time (for example, if one participant exits and the arrangements need to be assigned or novated to the existing or new participants).
- Called Sums: to fund the capital or operating expenditure commitments entered into by the Manager as agent, the Manager periodically issues “called sum” notices (typically monthly or quarterly, depending on the UJV agreement) to each participant which need to be funded. Financial sponsors should consider their ability to provide this periodic funding, particularly during the development stage before the mine generates cash, and whether the other UJV participants may require funding commitments to be given by financial sponsors. Under UJV arrangements, funding defaults typically trigger compulsory sale rights in favour of the other participants, or the right for the other participants to appoint a receiver to the defaulting participant’s interest.
- Governance: while the Manager carries out day to day operations, key decisions are reserved to the participants, or their representatives on a management committee. This typically includes approval of the annual budget within which the Manager must operate and the life of mine plan which is prepared on a rolling basis and may be reviewed from time to time. Financial sponsors should consider their ability to control key decisions, especially where there is potential for current or future misalignment between the participants. For example, participants may be generally aligned in the development phase. However, once a mine enters production, if a participant’s main interest is taking its share of product (for example, taking metallurgical coal for export to its steel manufacturing facilities), this may not align with other participants’ interests in having all product shares available for offtake to the highest bidder. This kind of inherent misalignment of priorities needs to be carefully managed through the UJV’s contractual framework, for example, through separate sales JV arrangements as between the participants, which are negotiated at the same time as the mining JV arrangements.
- Restrictions on dealings: similar to shareholder arrangements, UJV arrangements typically incorporate restrictions on dealings with interests in the UJV, such as pre-emptive rights and tag and drag-along provisions, which operate where there is a proposed partial or full exit by a participant of its interest in the UJV. Financial sponsors need to consider their ability to achieve a successful exit in the context of these restrictions.
