M & A
Private International Acquisitions
Charltons advises mineral companies on cross-border mergers and acquisitions. We advise on private share and asset purchases and auction sales. As well as drafting all key legal deal documentation we advise on the deal structure, due diligence, financing, timing and tender process where applicable.
To carry out a successful M&A transaction in the mining sector it is important to understand what distinguishes mining assets from other types of assets and to understand the laws underlying mining title and rights in the relevant jurisdiction (including mining-specific legislation, general property law, and native title / aboriginal issues). Depending on the jurisdiction and the nature and size of the target’s operations, local foreign investment, competition, mining and other approvals may be required.
Some of the common ways of acquiring mining assets are considered below.
One option is to purchase the assets of the mining project. A buyer may choose this option because they wish to acquire the specific mining project assets rather than all of the assets and liabilities of the company holding the project. Asset sales are also an option where the new owner wishes to cap legacy liability exposure.
Asset acquisitions generally require less due diligence than share acquisitions. However, they may be more complicated to implement due to the need to ensure that all relevant assets and related contracts are assigned to the incoming buyer. In some cases, a buyer may inherit liabilities with an asset (for example, environmental liabilities associated with a mine).
The tax treatment of share and asset purchases is different. In particular, transfer duties are generally lower on share purchases.
Where the mining project assets are held by an unincorporated joint venture (a common structure in Australia, for example), the incoming buyer will need to acquire an interest in the mining project by purchasing an interest in the joint venture. The project would be managed in accordance with the terms of the relevant joint venture agreement.
Another option is for the incoming buyer to acquire the shares in the company which holds the mining project interest. This can be done by a private purchase of shares in the private target company. A buyer could also subscribe for shares in the company holding the mining project rather than purchasing shares in the company from an existing shareholder. Different rules apply where the target company is listed.
Another method of acquiring interests in a mining project is by means of farm-in arrangements, where the incoming party is given a right to earn an interest in a mining project joint venture by funding project expenditure up to a certain minimum amount or carrying the cost of certain project activities. The interest in the project is earned once the funding obligation is satisfied.
Sellers will be looking to ensure a relatively clean exit with limited on-going liability and warranties will be negotiated on that basis. Different tax implications will likely apply to the disposal of mining assets depending on the chosen project structure.
Auction sales are relatively common in the mining sector. An auction sale is the sale of a company or business where the seller seeks competing bidders for the target. The process is used to obtain the best price and sale terms and to control the documents and timetable.
The timing and auction process normally include the following:
- Interested parties enter into a suitable confidentiality agreement with the seller
- The distribution of an information memorandum with a description of the target business and financial information to prospective bidders.
- A first round of “indicative” bidding.
- A due diligence investigation and review of draft sale documentation by a more limited number of bidders.
- A second round of bidding, accompanied by bidders’ responses to the seller’s draft documents.
- Negotiations with one or more bidders, leading to the conclusion of the transaction.
The most significant differences in process between an auction sale and sale by private treaty are that:
- The seller usually prepares the first drafts of the acquisition documents.
- Due diligence is normally conducted in a data room prepared by the seller to which the buyers are given access. The seller will commonly insist that the entire contents of the data room are deemed to be disclosed against warranties given in the acquisition agreement.
The main forms of consideration that can be offered on an acquisition are cash, shares or debentures. If the buyer does not have sufficient funds to finance the acquisition of the mining assets or target, the main options are to borrow cash or issue shares (either as consideration or to raise equity finance). Where the buyer is listed it may be able to issue convertible bonds that convert into its equity, possibly on satisfaction of certain value related conditions.
Charltons’ mission is to be the Hong Kong law firm of choice to natural resources companies, their professional advisers and other industry participants through the provision of informed, practical commercially-orientated legal advice from exploration to production, capital raising and beyond.
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