Exit by minority participants

As a result of the recent full or partial exits by a number of major mining companies from the Australian coal industry,  a number of minority participants have also considered how the sell part or all of their interest. The recent experiences of these minority participants has highlighted the key rights that minority participants should insist upon prior to entering into the joint venture, as well as various issues that arise from common terms in existing joint venture agreements.

This article sets out our key observations from these matters and provides guidance to parties considering entering into an Australian mining joint venture as a minority participant to ensure they are in the best position should they decide to sell some or all of their interest in the joint venture.

What works and what doesn’t

Attempting a competitive sale process without cooperation from the majority participant / manager v “Partnering” with the majority participant on their exit

In our experience, a minority participant usually does not have access to sufficient information to fully populate a data room and independently respond to bidder questions.

Joint Venture and Management Agreements rarely contain provisions that go so far as to require the majority participant/manager to assist with a minority sale process (e.g. responses to RFIs, management presentations, meetings with senior management and mine management, mine tours etc.).

This issue has been overcome in some circumstances by negotiating a tag-along sale or procuring assistance from the majority participant in managing a parallel sale or a subsequent sale process.

Where there is no contractual tag-along right, majority participants have generally still offered bidders the opportunity to also bid for the minority interest but there is no requirement on the majority participant to procure a sale of the minority interest.

Majority participants have mostly been unwilling to share the “control premium” with the minority participant and have sometimes required a discount on the tag-along price. Likewise the purchaser is generally unwilling to offer the control premium to the minority participant.

In our recent experience, tag-along rights have proved comparatively more beneficial to minority participants than pre-emptive rights. This is because a minority participant may have limited capacity to exercise a pre-emptive right or manage the mine for financial or internal approval/strategic reasons, even if they have concerns about the identity of a potential new joint venture participant/manager. In those circumstances, exiting the joint venture may be the best option.

A complete exit rather than only certain rights

A full sale (including a transfer of all of the rights that attach to a minority interest – e.g. voting rights, marketing rights, offtake rights etc.) is more likely to result in an exit on favourable terms for all participants than selling a minority interest without ancillary rights, for example as a financial investment.

This is because relatively few bidders will be interested in acquiring a minority interest without all or a combination of material voting (veto rights) and information rights, marketing rights and offtake (which is usually sold through the sales and marketing company rather than attached to the participating interest).

Minority participants have had difficulty generating competitive tension in the sale process as major mining companies are generally not interested in minority interests and the majority of bidders have been small-cap ASX-listed mining companies or private mining companies supported by private equity.  The offers have tended to include significant “earn-outs” in the form of royalties based on future coal prices, and in some cases vendor finance or credit support to procure the financial assurances to the State Government. The minority participant discount to the pro-rata value of the project has been significant in some cases. 

Where the minority participant is remaining in the joint venture (i.e. just “selling down”), the incoming purchaser will often seek to negotiate side “partnering” arrangements (e.g. to cooperate in exercising voting rights, restrict future exits etc.).

Bilateral negotiations v competitive sale process

Identifying a likely purchaser, and directly approaching the purchaser with a proposal for a transaction, may result in a more favourable outcome than a competitive sale process. This is because for many minority participants, a competitive sale process/auction is too inflexible. Bidders expect prompt decisions at the end of each stage of the process, which may not be compatible with internal approval requirements.

Modernised v outdated joint venture documents

The age and currency of the joint venture documents has an effect on the efficiency of the sale process. Where a joint venture has updated its documents to conform with current standards and to ensure consistency with current practice, the sale process often runs more smoothly.

In joint ventures that have been in place for long periods (e.g. 20 or more years), there are often gaps in documentation (e.g. missing assignment documents). This can make it difficult to interpret key provisions, including pre-emptive rights and change of control provisions in the JVA and the Management Agreement and approval rights to the new participant or a new manager.

‘Best case’ recommendations for future joint venture investments as a minority participant

• Pre-emptive right on a change of control in the majority participant: as discussed above, it may be difficult for the minority participant to exercise its pre-emptive right, but it does leave the commercial possibility of agreeing with the majority participant / purchaser to waive its pre-emptive right in return for acquiring a call option to increase its interest in the joint venture.
• Tag-along right on the sale of greater than a 50% interest or a change of control in the majority participant.  Tag-along right to sell to the majority participant based on fair market value or to the purchaser without discount based on the sale price agreed with the majority participant.

There are four main potential variations in a tag-along:

• the majority participant must not sell unless the purchaser also acquires the minority participant’s interest (i.e. there is a positive obligation on the majority participant to procure a tag-along sale, or otherwise an absolute restriction on sale);
• the majority participant must use best endeavours to procure a tag-along sale (but, if that is not possible, the majority participant can still sell its interest to the purchaser);
• the majority participant must ask bidders whether they would also like to offer to purchase the minority participant’s interest or advise bidders that the minority participant is interested in selling (but if there is no take up, the majority participant can still sell its interest to the purchaser); or
• the majority participant must cooperate with the minority participant or provide the minority participant with access to data room materials if the minority participant wishes to run a subsequent sale process after the majority participant completes its sale. This obligation must be subject to the right of the incoming purchaser of the majority participant’s interest to object to the use of confidential information (that it has purchased from the outgoing majority participant).
• Right to terminate the Management Agreement on a change of control in the majority participant or the manager.
• Obligation to seek consent of minority participants to the transfer of the Management Agreement. Consent not to be unreasonably refused or delayed provided objective standards of financial and technical competency are met.
• Right to approve the new participant.  Approval right could be qualified by a requirement to act reasonably on the basis that the new participant has appropriate financial resources