Companies looking to acquire mineral projects and mines must consider a wide range of crucial commercial, tax and legal issues – including the best way to structure the acquisition. Many factors will shape the choice of acquisition structure, including how developed the target project is.
If a target is an early-stage exploration project, the vendor will most often be a junior company with minimal technical data and few legal issues to consider. The most likely acquisition structure will be an option and/or joint venture over the mineral tenure or the purchase of 100 per cent of the mineral tenure, and the due diligence conducted by the buyer is often fairly minimal.
By contrast, an advanced-stage exploration target means the transaction will likely involve more advanced due diligence, particularly regarding mineral tenure, technical data, permitting and licensing, and environmental local community or First Nations issues. There will also be more material tax considerations. Buyers facing these factors essentially have three options:
(i) a joint venture or a purchase of a percentage of the mineral tenure;
(ii) acquisition of the holding company that holds the project (known as a special purpose vehicle (SPV)); or
(iii) if the target is the sole asset of a company, the buyer could acquire the entire company.
A development-phase target, with a completed feasibility study and nearing production will have more employees, mature mineral tenure, advanced technical data, permits, licences, and contractual arrangements, as well as complex tax issues to consider. This stage of target lends itself to an acquisition of either the SPV or an acquisition of the company owner itself.
Targets that are producing will, in addition to all of the factors discussed above, have increased environmental liabilities and reclamation obligations, more employees and more significant contractual obligations and tax considerations. The likely structure for this type of project would be to acquire the company or to buy the subsidiary operating company that owns and operates the operation.
Acquisition structure will also be shaped by other factors including:
- Consideration to be paid
- Location of target project
- Identity and jurisdiction of the Vendor
- Government or third-party approvals required
- Existing liabilities
- Tax considerations
- Foreign investment and competition issues
- Composition of shareholder base
In the majority of cases the decision will be between the sale of the assets of the project directly, or the sale of the shares of the SPV holding such assets. In general, vendors prefer share sales as they can divest liabilities and contractual obligations. Buyers often prefer asset sales, as they allow them to determine precisely which assets to acquire and which liabilities to assume, leaving the remainder with the vendor.
Which of these outcomes occurs will be determined by a range of factors including desired timing of the parties, applicable stock exchange rules (if either the buyer or seller are publicly listed), receipt of required approvals from governmental agencies, third parties or the vendor's or buyer's shareholders, and the extent to which environmental and other liabilities exist.
If the above factors lead to the determination that a friendly acquisition of the entire company is advantageous, then additional factors will need to be considered to determine what precise transaction structure is best-suited for the acquisition.
Factors such as the jurisdiction the target is incorporated under and, if the target is a public company, the location of the target's securities regulator and what stock exchange it is listed on will (in addition to the factors discussed above), shape the decision of what transaction structure to use.
If the target is a private company, a straight share purchase may be the optimal structure.
If the target is a public company, and it is a friendly transaction, there are three main acquisition methods available. These are:
(i) a take-over bid;
(ii) a statutory plan of arrangement; and
(iii) a statutory amalgamation or merger.
Each method offers its own set of advantages and disadvantages. For example, while usually the quickest approach, a take-over bid could entail a two-step process if 90% of the shareholders of the target do not tender their shares to the bid, as a second-stage squeeze out transaction, usually requiring a 2/3 vote of the shareholders, will then be required.
In contrast, in a plan of arrangement or an amalgamation, the required threshold for approval to acquire 100% of the target's shares is usually a 2/3 vote of the shareholders in the first instance. Plans of arrangement and amalgamations provide more flexibility in structuring a transaction but the process is driven by the target, which can be problematic. Plans of arrangement also require court approval.
In most cases the preferred method in Canada is a plan of arrangement. It is noted that a plan of arrangement or statutory amalgamation or merger may also be suitable for a private company target that has a significant number of shareholders.
Once the desired structure is determined, the vendor and the buyer will need to settle on final terms and conditions in a definitive agreement, and various representations, covenants, post closing restrictions, closing conditions and termination fees will need to be negotiated. When these are all decided on, then the parties can proceed to close the transaction.
The foregoing is not to be construed as legal advice. The optimal structure for any transaction will necessarily depend on the specific facts and nature of the transaction.
Darrell Podowski is a partner at Cassels Brock & Blackwell LLP in Vancouver. He has worked as an in-house lawyer with Canadian metal and mining company Teck Resources Inc. and as an exploration geophysicist with Amoco Canada Petroleum Company.
Originally published in Lawyers Weekly.
