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WA Resources Update | May 2015
Welcome to the latest edition of WA Resources Update, your regular newsletter about key developments for the Western Australian mining sector.
Forget planking, backdoor listing is the new craze!
We had a $2 coffee at a West Perth café the other day. Whilst cheap coffees in Perth remain the exception rather than the norm, it is a stark reminder the mining boom is well and truly over. With falling commodity prices and demand, little investor interest and debt simply not an option, many small resource companies are significantly cutting back on their activities, leading to an ever increasing number of ASX listed companies which are more or less dormant. We have recently seen a wave of (mainly) technology companies use struggling ASX listed resources companies as a vehicle to list on the ASX, through a backdoor listing. The popularity of back door listings is indisputable, but why?
Why the popularity?
There are a number of reasons why a backdoor listing may be attractive to an entity seeking to list:
- Cash is King: every business needs cash to survive, operate and grow. To list on ASX, (broadly) a company needs to demonstrate that it is generating sufficient profits, or (more commonly) show that it has sufficient assets, and (after a capital raising if necessary) sufficient working capital to carry out its stated business objectives. Many listings fail at this stage because they fail to raise sufficient funds to meet these requirements. A listed shell with a healthy cash balance will therefore be attractive to an unlisted entity seeking to list as it decreases the amount the combined entity needs to raise as part of the listing (or in rare cases, may even mean that the entity does not need to do a capital raising to list).
- Spread: to list, ASX requires a company to have at least 300 to 400 shareholders (depending on the number of “related parties”) each holding at least $2,000 worth of shares (excluding restricted securities). This is commonly referred to as having sufficient “spread”, and is aimed at ensuring there will be sufficient liquidity in the company’s shares on listing. It is common that an unlisted entity seeking to list will only have a small number of shareholders, and need to rely on a capital raising process to get spread. If a listed shell already has shareholders holding parcels of shares worth $2,000 (or more), a backdoor listing will make it easier for the combined entity to get spread.
- Relaxation of the 20 cents rule: ASX requires that a company conducting a public offer in connection with a listing must do so at an issue price of at least 20 cents. Traditionally, in a backdoor listing process, if a listed entity’s share price has been trading at significantly below 20 cents, it would have to do a consolidation of capital to boost the (implied) share price closer to 20 cents so that it is closer to the capital raising price. ASX will now consider an application for a waiver from the 20 cent rule for backdoor listing capital raisings (and the consolidation requirement) provided certain conditions are met. This allows an entity seeking to list to conduct the public offer capital raising at an issue price as low as 2 cents (ASX won’t allow anything lower than this). This may make it more attractive to investors who may think that it is easier to realise value from their investment (for example, they may consider it more likely that a 2 cent stock will rise to 6 cents, as opposed to a 20 cent stock rising to 60 cents).
Eyes wide open
While there are some distinct reasons why a backdoor listing may be more attractive than a conventional listing, it shouldn’t be assumed that they are necessarily easier than a conventional listing. Think of a backdoor listing as involving all the time and expense of a conventional listing, plus:
- a private M&A transaction: where the listed entity acquires either the shares or business assets of the non-listed entity;
- a Shareholder’s Meeting: the acquisition of the shares or assets of the non-listed entity will typically lead to a change in the nature and/or scale of the listed entity which requires shareholder approval and, depending on the transaction, an Independent Expert’s Report may need to be commissioned (see below);
- an Independent Expert’s Report: if the listed entity issues shares as consideration for the shares or assets of the non-listed entity and this results in a person exceeding the 19.99% takeovers threshold, shareholders will have to approve the acquisition, and the notice of meeting will need to include an Independent Expert’s Report on whether the acquisition is fair and reasonable to other shareholders;
- additional Due Diligence: depending on the circumstances, additional due diligence may be required in a backdoor listing. For example, the unlisted entity may want to conduct due diligence on the listed shell to ensure it is “clean” or the listed entity will want to conduct “purchaser’s” due diligence on the entity being vended in; and
- additional Financials: additional financial information is generally required in a backdoor listing. Where a listed entity is acquiring the shares or business of a company in connection with a listing, ASIC’s view is that the prospectus should generally include audited accounts for the listed entity and any businesses it is acquiring, plus a pro forma showing the effects of the acquisition and offer.
Recent ASIC concerns
ASIC raised concerns with 22 of the 30 backdoor listing prospectuses it reviewed between July and December 2014 and issued stop orders in relation to 6 of them¹. ASIC has stated that they will continue to focus on these prospectuses in the coming months.
ASIC’s key concerns relate to:
- where a business is unique, and has a high proportion of intangible assets in their financial statements, the prospectus must be able to explain the business without the use of jargon, and a justification for the valuation of intangible assets must be provided;
- insufficient financial disclosure, including a lack of operating history, lack of audited financial information, and disclosure of information not presented in accordance with accounting standards;
- insufficient disclosure of a company’s business model and use of proceeds;
- disclosure of directors’ history not consistent with ASIC’s policies; and
- risk disclosure not adequate or appropriate tailored to a company’s circumstances.
The above concerns would apply equally to any business seeking to do a conventional listing, but the fact they have been raised by ASIC in the context of backdoor listings perhaps suggests that there may be a misconception that a lesser standard of disclosure applies. This is not the case and entities seeking to list this way should be aware that it will be subject to the same standard of prospectus disclosure as for a conventional listing
¹ASIC, “Report 423: ASIC regulation of corporate finance: July to December 2014” (February 2015), pg 12
It's not you, it's me... how to exit from a joint venture and still remain friends
Perhaps unsurprisingly in recent months we have experienced a sharp increase in queries from clients seeking a quick, easy and low-cost exit from their joint venture arrangements. While this might sound straightforward in theory, there are certain things which should be considered by any joint venture participant contemplating a withdrawal from their joint venture. Although the outcome for participants will depend on the terms of the joint venture agreement in question, this article highlights some of the key issues which might arise for a withdrawing participant.
Procedure to be followed
Whether a participant is able to withdraw from a joint venture will ultimately depend on the terms of the particular joint venture agreement. However, where the joint venture involves an earn-in or sole-funding stage, the right to withdraw during the earn-in or sole-funding stage will often be conditional on the farminee having spent a certain minimum amount on the tenements and/or having met statutory expenditure requirements for the tenement year in which it intends to withdraw.
In the case of an exploration joint venture, where the earn-in has been completed and the participants both hold a percentage interest in the joint venture, it is fairly common for either participant to be entitled to withdraw from the joint venture by providing a certain number of days’ written notice to the other participants. Again, it would not be unusual for the withdrawing participant to be required to meet its share of the statutory expenditure requirements for the tenement year in which it intends to withdraw or to meet its share of the work programme and budget in place at the time of withdrawal.
In contrast, due to the difference in funding requirements between exploration and mining joint ventures, a joint venture agreement governing an operating mining project will often not permit participants to withdraw. If withdrawal is permitted, the withdrawal provisions will often be drafted in such a way that the issue of a withdrawal notice by one participant triggers an option for the remaining participants to also elect to withdraw and, if necessary, wind-up the joint venture. The mining joint venture agreement might also include provisions under which the withdrawing party is required to provide security for any obligations or liabilities arising prior to the date of withdrawal, including rehabilitation and other decommissioning costs.
Resignation as manager
Regardless of whether the withdrawal is from an exploration or mining joint venture, if the withdrawing party is the manager of the joint venture, it may be necessary for the withdrawing party to formally resign as manager.
Again, the procedure for resignation of the manager will depend on the terms of the joint venture agreement. Sometimes the joint venture agreement will provide that a withdrawing participant will automatically cease to be the manager on withdrawal. Where the agreement does not provide for automatic resignation of the manager on withdrawal, the withdrawing participant will have to take active steps to resign as manager. Commonly the agreement will require that the manager give a certain period of notice in writing for the resignation to be effective.
Finally, it is also important for a participant contemplating withdrawing from a joint venture to bear in mind the potential duty consequences of that withdrawal. Transfer duty (being the most common type of “stamp duty”) is levied by each state and territory government and will apply to a wide range of transactions, including the transfer of land or an interest in land such as mining tenements. In this regard, the transfer of an interest in a mining tenement will be dutiable in all states and territories across Australia.
Where a withdrawing participant holds a legal interest in the tenements the subject of the joint venture, a withdrawal will necessarily require the transfer of that interest to the remaining participant(s). The joint venture agreement may go so far as to state that, on withdrawal, the withdrawing participant will be deemed to have assigned or transferred its percentage interest in the joint venture to the remaining participants. The agreement will also often specify which party is responsible for paying the costs (including any duty) associated with a withdrawal. Often, the party responsible for meeting those costs will be the party electing to withdraw from the joint venture. If the agreement is silent in relation to which party will pay the duty calculated on the withdrawal, it will be necessary to look to the applicable legislation in the relevant state or territory.
The position is less clear where the withdrawing participant is yet to earn a legal interest in the joint venture property (for example, during the farm-in or earn-in stage). In this situation it will be necessary to analyse the terms of the applicable duties legislation in the relevant state or territory to determine whether the legislation is sufficiently broad that duty will also be payable on a party’s right to earn a joint venture interest.
On the basis that duty is likely to be payable on withdrawal from a joint venture, the withdrawing participant should consider the likely value of the interest which it is effectively transferring to the remaining participant(s). In all states and territories, duty is calculated on the higher of the consideration (including any assumed liabilities) for, and the unencumbered value of, the dutiable property. As no consideration is payable in the case of a withdrawal and in circumstances where the parties are acting at arm’s length, the relevant stamp duty authority will look to the value of the property being transferred in calculating the duty payable. In most cases involving a withdrawal from a joint venture it can be argued that the value of the property is negligible because the withdrawing party is not receiving any consideration from the withdrawal - it is in effect cutting its losses and exiting from a project which it no longer considers viable. These arguments will, however, be limited where the withdrawing party is receiving some form of consideration or is in receipt of an independent valuation of the tenements which attributes some value to the withdrawing participant’s interest.
Good fences make good neighbours: safeguarding your right to mine against alternative infrastructure development
The co-existence of LAA tenure within a mineral field
It is the nature of operating in WA that mining companies will be faced with third parties wanting to obtain tenure that overlaps their tenements in order to construct and operate infrastructure, either for alternative mining, or for non-mining, purposes.
However, it is not always open for an infrastructure developer to obtain that tenure under the Mining Act. While such infrastructure could be intended to serve the mining industry (such as, transmission lines and other energy related infrastructure), if there is insufficient connection to mining, or a specific mining operation, tenure under alternative legislation may be needed.
More specifically the infrastructure developer may seek tenure under the Land Administration Act 1997 (WA) (LAA), such as a section 91 licence or an LAA easement.
As a result of the far less prescriptive nature of the tenure application and objection procedures of the LAA, there are a number of issues that a mining company will need to consider to safeguard its interests when faced with an overlapping application for LAA tenure. We explore these below.
We have also set out what we consider is critical information that should be sought by a mining company from an applicant who is seeking tenure under the LAA for infrastructure development.
The LAA application process – limited rights to be served and object
Under the LAA:
- there are limited requirements for an application to be advertised or served on underlying tenement holders;
- there is no public way to search an application or monitor its status; and
- there are no statutory rights to object (except where compulsory acquisition is involved).
Given these limitations, a mining company should ask the following questions upon being made aware of an overlapping tenure application:
- as discussed further below, the type of LAA tenure that has been applied for and its purpose;
- the area to which the application applies, as confirmed by precise mapping and Landgate or geospatial data; and
- the nature of the proposed works, setting out details of the timetable for the works, when access to land is needed and the extent of ground disturbance that will occur.
What tenure is being sought and on what conditions
For the most part, the LAA does not itself specify any of the rights or obligations that will be incorporated in the tenure, when granted. Under the LAA, the Minister for Lands is generally authorised to grant tenure for any purpose and on terms and conditions that it sees fit in the given circumstances, including as to the term or duration of the tenure.
As such, there will be a negotiation between the applicant and the State as to the terms and conditions that will be incorporated under the tenure.
In our experience, applicants may be reluctant to reveal the details of the terms and conditions that are being negotiated with the State to a third party. In these circumstances, an impacted mining company cannot easily avail itself of the conditions on which co-existing tenure may be granted. This may place it at a material disadvantage when it comes time to negotiate and agree to any consent arrangement that may be put in place.
Therefore, it is critical that there are enquiries made of the applicant for relevant details of the tenure application, including pertinent terms and conditions that may adversely impact the rights of underlying tenement holders.
Safeguards for a mining company - clearance under the Mining Act and LAA approval processes
Despite the limitations of the LAA, there are several safeguards in place for mining companies.
- section 16 (3) of the Mining Act effectively provides that no LAA tenure shall be granted in a mineral field without the approval of the Minister for Mines (known as a ‘section 16(3) clearance’). If a mining company does not provide a consent for the grant of the tenure, the Mines Department will consult to hear its concerns as one factor in deciding whether or not to grant the clearance. However, we understand that the consent and consultation considerations of the Mines Department are set out in policy only;
- in addition, section 117 of the Mining Act provides that no grant of LAA tenure has the effect of injuriously affecting an existing tenement holder; and
- finally, depending on the type of LAA tenure sought, the Minister for Lands either must not, or as a matter of policy would not, grant the tenure without an impacted mining company having consented (usually evidenced in a consent letter or under an access and consent agreement).
Navigating a way through the statutory approval, intra-governmental referral and consultation processes
Notwithstanding the above, a conclusion can be drawn that the rights of mining companies in regards to LAA tenure applications can be found somewhere within a complex matrix of statutory, intra-governmental referral and consultation processes. This makes it difficult for a mining company to clearly understand its rights where an LAA tenure application may impact its existing or prospective mining activities.
Accordingly, we suggest that:
- a proper understanding of the impact on the rights of a mining company relies on a high level of consultation with the State (or an applicant), if not advice from legal or other advisors who are well versed in the interplay of the LAA and Mining Act processes; and
the tenure applicant should be requested to provide as much specific information as possible regarding:
the LAA tenure application and the proposed construction activities. Ideally, a copy of the tenure instrument will be obtained prior to the State and the applicant having executed it; and
- the consultation process that will be followed by it or the State for the grant of the tenure. One should not assume that consultation will necessarily occur at a time that is advantageous to the interests of all concerned.
A consistent and transparent regulatory framework
For an efficient industry, there should be a consistent and transparent regulatory framework to enable parties to ascertain how proposed infrastructure may best co-exist with existing mining operations in all circumstances.
As such, one is left querying why the State’s key pieces of land tenure legislation (ie the LAA and the Mining Act) differ in such fundamental ways. What these differences mean is cost, time and uncertainty for the industry.
Transfer of an interest in an Exploration Licence during its first year of term – do you need Ministerial consent?
The Western Australian Court of Appeal recently delivered its decision in Commissioner of State Revenue v Abbotts Exploration Pty Ltd WASCA 211, a case which considered whether an exploration licence holder can transfer or otherwise deal with a legal or equitable interest in an exploration licence during the first year of term, and without obtaining Ministerial consent. This case will be relevant to the industry for three reasons. First, it confirms that a tenement holder cannot transfer a legal or equitable interest in the exploration licence during its first year of term without obtaining Ministerial consent. Second, it is instructive as to what will constitute a legal or equitable interest in a mining tenement. Third, it assists in understanding what interests will support the lodgement of a caveat to protect an interest in a mining tenement.
Purported transfer in the first year of term of the Sacculus Exploration Licence
The dispute arose out of an option deed entered into on 8 March 2010 (Option Deed) that granted an option to Anuman Holdings Pty Ltd (Anuman) to acquire an “Interest” in various mining tenements held by Sacculus Pty Ltd (Sacculus). “Interest” was defined in the Option Deed as meaning the right and entitlement of Anuman to prospect, explore, mine and develop for all minerals on the “Mining Interests” and the benefit of all receipts and income from those activities. “Mining Interests” included Sacculus’ application for exploration licence 51/1367 (Sacculus Exploration Licence). It was also a condition precedent of the Option Deed that Sacculus would “provide and sign all documents necessary to ensure that Anuman became the registered holder of the Interest”, and that if, on settlement, “any part of the Interest is not a granted tenement or Ministerial consent is required to transfer any part of the Interest, [Sacculus] will hold that part of the Interest on trust for [Anuman] until such time as the tenement is granted or any necessary Ministerial consent is granted”.
Anuman exercised the option on 9 March 2010 and paid the purchase price of $50,000 for the “Interest”. On 14 July 2010 Sacculus became the registered holder of the Sacculus Exploration Licence. On 18 May 2011, after the grant of the Sacculus Exploration Licence, Abbotts Exploration Pty Ltd (Abbotts Exploration) acquired shares in Anuman. The Commissioner of State Revenue alleged that Abbotts Exploration was required to pay duty for the acquisition of the shares in Anuman as, by reason of Anuman’s “Interest” in the Sacculus Exploration Licence, Anuman was a “landholder” for the purposes of the Duties Act 2008 (WA) (Duties Act).
To establish whether Anuman was a “landholder” at the relevant date, it was necessary to determine whether the rights conferred by the Option Deed in respect of the Sacculus Exploration Licence, during the first year of its term, were an estate or interest in a mining tenement within paragraph (ca) of the definition of “land” in the Duties Act. This also required the Court of Appeal to consider the application of section 64 of the Mining Act 1978 (WA) (Mining Act).
Section 64 of the Mining Act
Section 64 of the Mining Act provides that during the first year of the term of an exploration licence, a legal or equitable interest in the exploration licence cannot be transferred or otherwise be dealt with without first obtaining Ministerial consent.
The Court of Appeal considered, among other things, whether the Option Deed that provided for a transfer of an “Interest” in the Sacculus Exploration Licence to Anuman during its first year of term, which had a condition precedent that Sacculus would provide and sign all documents necessary to ensure that Anuman became the registered holder of the Interest, is capable of transferring the “Interest” in the Sacculus Exploration Licence to Anuman before Ministerial consent is obtained. The Court of Appeal confirmed the principle applied by the High Court in McWilliams v McWilliams Wines Pty Ltd (1964) 114 CLR 656 and Brown v Heffer (1967) 116 CLR 344, that where Ministerial consent is required as a condition precedent to a contract for the sale of land, even where full consideration has been paid for the land, the land would not be transferred to the purchaser until the Ministerial consent has first been obtained. Therefore, the Court of Appeal held that even though Anuman had paid the purchase price for the “Interest”, until Ministerial consent had been obtained Sacculus could not validly transfer the “Interest” in the Sacculus Exploration Licence to Anuman.
The transfer of the “Interest” in the Sacculus Exploration Licence to Anuman pursuant to the Option Deed was in breach of section 64 of the Mining Act as it purported to transfer the “Interest” in the Sacculus Exploration Licence during its first year of term without obtaining Ministerial consent. The Court considered whether the Option Deed was therefore illegal and void as it was in breach of section 64 of the Mining Act. It was held that section 64 would operate to prevent beneficial ownership immediately vesting in Anuman upon the grant of the Sacculus Exploration Licence but that the prohibition in section 64 would not extend beyond the first year of the Sacculus Exploration Licence or if Ministerial consent was obtained. The Court therefore did not consider that the Option Deed was illegal or void beyond the first year of term of the Sacculus Exploration Licence (or otherwise after obtaining Ministerial consent). The Court also confirmed the principle in Anaconda Nickel Ltd v Tarmoola Australia Pty (2000) WAR 101 that section 64 of the Mining Act does not render illegal or unenforceable any personal contractual rights created under any agreement that provides for a transfer or other dealing without obtaining Ministerial consent.
The meaning of “estate” or “interest” in a mining tenement
The Court of Appeal examined the meaning of the terms “estate” and “interest” in relation to mining tenements under the Mining Act. The Court held that in relation to the term “estate”, the only specific tenements to which the term “estate” would apply under the Mining Act are mining leases and general purpose leases. The rights granted to Anuman under the Option Deed could not therefore include an “estate” because the concept of “estate” does not extend to exploration licences.
In relation to the term “interest”, the Court considered the meaning of “legal interest” and “equitable interest”. “Legal interest” was held to refer to the proprietary interest of the holder of a tenement or the holder of a mortgage of a tenement which is evidenced in writing and the particulars of which have been entered on the Department of Mines and Petroleum’s register. The Court held that an “equitable interest” in a mining tenement is a proprietary interest in a tenement that is not a “legal estate or interest”. The “proprietary interest” comprises, relevantly, those proprietary rights over, affecting or in connection with the mining tenement that are referable to the particular “estate” or “interest” in question, and are conferred by the Mining Act and (subject to the Act) any instrument or instruments in writing.
The Court found that since the Sacculus Exploration Licence had not been granted at the time that the Option Deed was entered into, when the option was exercised or on payment of the purchase price, Anuman had no existing proprietary rights in relation to the Sacculus Exploration Licence and therefore could not hold a “legal interest” in the Sacculus Exploration Licence. Further, as Sacculus had not obtained Ministerial consent for the transfer of the Sacculus Exploration Licence to Anuman, the Option Deed was not effective to transfer an “equitable interest” in the Sacculus Exploration Licence to Anuman.
Would Anuman have the right to lodge a caveat to protect its “interest in a mining tenement”?
Although the decision clarifies when a legal or equitable interest in a mining tenement will arise, it also provides the basis for a stricter interpretation of what is an “interest in a mining tenement” for the purpose of lodging a caveat under section 122A of the Mining Act. In Anuman’s case, for example, on the basis of the Court’s interpretation of “interest in a mining tenement”, it would appear that as Anuman held no “legal interest” or “equitable interest” in the Sacculus Exploration Licence (until the first year of term has expired or Ministerial consent has been obtained), Anuman would have had no valid “interest in a mining tenement” to support the lodgement of a caveat against the Sacculus Exploration Licence under section 122A of the Mining Act. This may have ramifications for clients who seek to lodge caveats to register an interest in a mining tenement that would not strictly be considered a “legal or equitable interest”, such as (perhaps) royalty interests. This case suggests that the holder of a royalty interest may not have an instrument that can support the registration of a caveat against the mining tenement to protect that interest as it holds no proprietary interest in the mining tenement, and holds merely a contractual right.
However, pursuant to section 122A(2) of the Mining Act, an interest holder may be able to lodge a caveat to protect its interest in a mining tenement, regardless of whether the interest holder has a valid “interest” in the tenement, if there is an agreement relating to the sale of the holder’s interest in the tenement which provides that either party may lodge a caveat against the tenement forbidding the registration of a dealing or surrender affecting the tenement or interest in question. Section 122A(2) of the Mining Act therefore provides a significantly broader basis for lodging a caveat to protect an “interest” in a tenement, even in circumstances where the “interest” (such as a royalty interest) would not be considered a “legal or equitable interest” in the tenement.
Lessons learnt from Anuman and Sacculus
This case demonstrates when a relevant interest in a tenement will arise and whether the interest constitutes a “legal or equitable interest”. The key takeaway from this decision is that even where an interest holder has paid the purchase price to acquire an “interest” in an exploration licence during the first year of it's term, a valid “interest” in the exploration licence will not arise for the purposes of the Mining Act unless the interest has been transferred to the interest holder after the first year of term of the exploration licence or Ministerial consent to the transfer has been obtained. Further, it is possible that the interest holder will not be able to lodge a caveat against the mining tenement to protect its personal contractual right, as the person will not be considered to hold a valid legal or equitable “interest in the mining tenement” as required by section 122A of the Mining Act.