As most people connected with the mining industry know, the joint venture is a creation of the tax system and therefore cannot possibly be either simple or straightforward. In fact some people find it utterly confusing. At law a joint venture is a partnership, but because of custom of the trade within the mining industry (and some other industries), it has some special features: * A joint venturer may not have full authority to bind the joint venture in the same way that a partner has the legal power to bind the partnership.
* A person in the mining industry (or familiar with the industry) may be under some obligation to confirm that the operator has the legal power to enter into an agreement and bind the venturers (if the operator does not have this power, then that person may not be able to enforce the agreement against anyone except the operator).
* A venturer may not be fully liable for the liabilities of the joint venture (as a partner is for the liabilities of a partner).
The above features are similar in that they deal with potential liability of a participant in a venture. In addition they all are variations from the general law relating to partnerships. Why? Because within the mining industry, “that is the accepted way of doing things,” or, in legal terms, a custom of the trade exists that varies the usually applicable common law.
Now what does this all mean in practical terms? It means that so long as the necessary criteria are met (note that “may” in the above is a critical word), then some protection is gained for the venturers of a joint venture. On the other hand, if all the criteria are not met, then there is no special circumstance; and in the case of a joint venture, the venturers will be faced with unlimited liability. The picture is not, however, all dark because a joint venture may be a partnership with respect to one transaction (i.e. a transaction between the operator and a supplier who is not at all familiar with the industry) but, at the same time, be a joint venture with appropriate protections for its venturers, with respect to other transactions where the necessary criteria are met.
What does all this “legalese” mean? It means that, as a joint-venture participant, you cannot just sit back and figure that the joint-venture agreement provision, which states that you have no liability in excess of the amounts that you agree to contribute, means what it says and protects you.
The logical question to ask now is: “So what can I do to protect myself?”
* Theoretically you can involve yourself in the day-to-day operation of the joint venture and make sure that the operator does not exceed his authority. In practice, if you try this and the operator does not “politely suggest” that you mind your own business, then in all likelihood one of the other venturers will so suggest. The idea is just not practical and it defeats one of the basic reasons for having a joint venture.
* You can insist on an “airtight” agreement that sets out clearly and extensively all the powers of, and restrictions upon, the operator. This is fine except there is no such thing as an airtight agreement, and an agreement can’t stop an operator from exceeding his authority, either inadvertently or intentionally. It can only set forth what an operator should do.
In the long run, if you choose to proceed by way of joint venture, your best “insurance” is probably the reputation of the operator, together with together with his knowledge of the industry and its practices, and his adherence to these practices. It also helps if the operator is honest and prepared to follow required contractual procedures without taking “shortcuts.”
So what is a reasonable alternative? A corporation? To a large extent joint ventures have become “fashionable.” The larger mining companies like them because they offer flexibility and, from a tax point-of-view, all deductions flow through to the venturers and can be used against income from other sources. Initially the agreements were reasonably straightforward and the venturers believed themselves to be protected. As time passed, the lawyers managed to bring into question the adequacy of this protection and to produce more and more sophisticated (i.e. complicated) agreements. This was not without cause because, as joint ventures became more common, it was realized that the agreements that established them had to cover many areas besides the doing of mining or exploration. They had to establish such things as: decision- making procedures; protections for the parties; methods to establish work programs and budgets, and participation or non-participation therein; the effect of non-participation or default in payment of a call; and so on.
If a corporation is used to hold and do work on a property, some of the problems of a joint venture are dealt with simply because it is a corporation. On the other hand, some new problems will have to be addressed. Decision-making can be handled through the board of directors and “special” considerations or restrictions can be imposed by agreement. At law, the directors are obligated to act in the best interests of the corporation (and not the shareholder they represent) and a shareholder has rights that are set forth in the relevant corporation’s statutes. Also, a shareholder’s liability is limited to the purchase price of his shares. In addition the governing statute will handle a number of other matters which, in a joint venture, have to be set forth in the joint venture agreement. A joint venture does not have any constating legislation and documents, such as bylaws, to fall back on if the draftsman has forgotten to cover a matter. With the joint venture you will probably have to go back to the bargaining table or resort to some procedure like arbitration to address the matter while, with a corporation, the law or its constating documents may offer a solution.
The tax treatment of expenditures made within a corporation can be “tailored” to have, to some extent (but maybe not completely), the same effect for a shareholder as if a joint venture were used. For example, Canadian exploration expense cee and Canadian development expense cde can be renounced if the corporation is constituted as a joint exploration corporation under the Income Tax Act (Canada). Alternatively, the corporation may be constituted as the agent of the shareholders so that all expenditures are made by the corporation as the shareholders’ agent. If either of these is used, appropriate documentation must be in place before any exploration moneys are advanced by a shareholder.
Variation (or dilution) of interests in a corporation can create problems as the interests are represented by shares, and some care must be taken in transferring shares back and forth so that tax is either minimized or not attracted. It is usually not attractive to merely issue further shares as a shareholder funds further work, because to do so may attract unwanted income tax effects. The other problem with shares is that, if they are common shares (as is usually the case), then, unless a non-participant or defaulter transfers all of his shares, he will always have a voting interest in the corporation and there will always be a minority shareholder to be concerned with. This certainly is not an insurmountable problem and, with proper planning and forethought, it can be dealt with in a way that will give the parties their desired arrangements; but it will certainly be more complex than the usual joint-venture arrangement of proportional dilution to a stated plateau and then conversion to a royalty.
In short, when considering potential arrangements whereby two or more parties intend jointly to explore or develop a property, do not immediately discard the idea of using a corporation rather than a joint venture. The corporation can offer some advantages. Karl Harries is a graduate mining engineer and a partner with the Toronto law firm of Fasken & Calvin and the interprovincial law firm of Fasken Martineau Walker. The information in this article is summary and general in nature
and is not intended to be taken or acted upon as legal advice.
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