2023年10月27日

Joint Ventures in US Mining: Considerations for Critical Mineral Mining Ventures

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The continuing growth in the electric vehicle (“EV”) industry and the role of energy storage in the clean energy transition have increased the importance and urgency around securing and developing the United States’ supplies of rare earth and critical minerals1 that play vital roles in the production of batteries, semiconductors and clean energy technologies.  

For years, the US has relied heavily on imports of these minerals from countries such as China and Russia.  However, as the world transitions to greener energy, reports have shown that US and global demand for these minerals is likely to increase very significantly. Accordingly, the US government has emphasized the need to strengthen the country’s supply chain for critical minerals.  While increased focus on critical minerals is occurring across the globe, acquisition of North America-based deposits can, in addition to promoting sustainable supply, bring significant financial benefits to automakers, mining companies and battery manufacturers (e.g., US Department of Energy Clean Vehicle Credit and other tax incentives).

Against this backdrop, there have been a growing number of investments in mining joint ventures in the US as companies focus on exploration and seek strategic partners.  As just one example, earlier this year General Motors announced a $650M joint venture with Lithium Americas to develop a lithium mine in Thacker Pass, Nevada.2  This is consistent with the global trends in mining, with joint ventures accounting for more than 40% of the current production at the 10 largest mines in the world.3

Why joint ventures?

While investments into mining operations can take many forms, joint ventures (“JVs”) have become popular choices for companies seeking to mitigate or otherwise share the risks of investing in new mining operations.  In addition to the sharing of financial risks, JVs also allow companies to create synergistic relationships, such as by enabling non-US (or otherwise non-local) entities or parties with limited experience in mining operations to partner with established market players with existing supply and logistical capabilities and other expertise.  A US JV can help non-US companies gain quicker access to the US mining sector when teaming up with a strong US business partner.  While JVs can in appropriate cases be advantageous in enabling more collaborative and efficient access to new markets or opportunities than a conventional acquisition, the structure of the JV arrangements is important in maximizing returns, reducing risk and addressing appropriate governance, including to avoid deadlock or other fallout between parties.

How are US JVs typically structured?

JVs comprise strategic combinations of two or more businesses or individuals and can be structured in a variety of ways.  The governance of JVs in the US is associated more with the structure or legal arrangements of the JV rather than whether a “joint venture” is actually present.  Freedom of contract principles in the US mean that parties can combine and collaborate freely with one another on almost any matter, including by or through strictly contractual arrangements (such unincorporated arrangements are referred to here as “contractual joint ventures”), or the establishment of JV-dedicated special purpose vehicles (“SPVs”).

Different legal approaches and structures provide different advantages.  For example, an SPV JV will generally provide limited liability to its members, meaning the exposure of the parties will be limited to the extent of their investment into the JV entity, with the JV able to act and conduct business in its own name.  SPV JVs in the US tend to be structured as limited liability companies (“LLCs”) or as corporations and generally provide greater flexibility in how to allocate rights and duties among its members.4  An LLC is also commonly chosen in the US for this purpose because it offers the “flow-through” taxation of a traditional partnership, the limited liability inherent to LLCs and significantly more tax and corporate governance flexibility in comparison to a corporation.5  

On the other hand, contractual JVs may in some cases be viewed as more streamlined to manage day-to-day operations because all aspects of the project and relationship between the JV parties are set forth in the contract.  Contractual JV arrangements can also include, among other things, offtake and supply agreements, consortium project agreements, and cross-licensing of intellectual property, with each party to the contractual JV typically remaining independent from the other and not taking on the other party's obligations or risks to third parties. 

Regardless of the chosen JV approach or structure, proper documentation of the arrangement is critical and participants should consider entering into formal JV agreements to  address the full range of key considerations and expectations the parties have, such as with respect to the operation of the project, what expertise, assets or other value each party brings and will contribute, ongoing contribution obligations, the structure of cash calls, the prospect of bringing in new venture partners and the JV’s governance structure. 

Governance of the JV will typically depend on the relative ownership and control rights of the parties and number of JV partners.  For example, in JVs where an SPV is established, the right to appoint the SPV’s board of directors or managers can commonly be divided between the parties in accordance with their equity ownership.  This could either lead to a “deadlock” scenario in a truly 50:50 JV, or alternatively to a structure where one party holds a “majority” of seats with the “minority” parties worried about how to protect against being outvoted on key JV decisions based on pure majority vote.  In a 50:50 JV or a JV where one party has a “veto right” over a major decision, which inherently runs a greater risk of becoming deadlocked, the JV agreement (i.e., usually an operating agreement for an LLC or a shareholders agreement for a corporation) can often include mechanisms which allow for the business to operate temporarily when the parties cannot agree on matters.  These procedures can be structured in a variety of ways—for example, some JV agreements build in a period of time where the senior executives of each party are required in good faith to try to resolve the disagreement.  If that step fails, the deadlocks relating to selective issues can where appropriate be referred to experts or arbitrators for resolution, or alternatively can be resolved through a variety of buy-sell provisions.

In a JV where one party has stronger voting rights or rights to operate and control the day-to-day functions of the JV, minority or non-controlling parties will typically negotiate in the JV agreement the material and other special actions and decisions that must involve the minority partner’s approval.  These minority approval rights can take various forms (e.g., “special approval rights” or “supermajority approval rights”) and require, whether at the board or equity holder level, different voting thresholds or even designated-party vetoes before applicable actions can be taken.  Minority partners in particular should, among other things, consider carefully negotiating matters such as appointing or replacing board members or managers, information access rights and financial reporting, exit rights, preapproval of budgets or large capital expenditures, settlement of litigation, material changes to corporate or governing documents of the JV, and operational policies (e.g., a related party transaction policy and a procurement policy).

For more information, please refer to this previous client update of ours that reviews general JV governance considerations, including examples of different approval rights and suggestions on dispute resolution: https://www.mayerbrown.com/en/perspectives-events/publications/2020/11/joint-ventures-in-mining.

US-specific regulatory and other considerations for mining JVs

The US regulatory landscape for investments in critical mineral mining projects is rapidly evolving, and while participation in mining JVs can benefit from increasing US government incentives, it also implicates several compliance requirements and considerations. 

Inflation Reduction Act

The Inflation Reduction Act, enacted August 2022, includes hundreds of billions of dollars in green energy incentives and provides several incentives for critical mineral mining operations based in the US. Purchasers of certain qualifying EVs can be eligible for up to a $7,500 tax credit, with $3,750 of such credit dependent on establishing that, for vehicles placed in service between 2024 and 2026, at least 50%6 of the value of the critical minerals (as defined in Section 45X(c)(6) of the Internal Revenue Code (“IRC”)) in the new vehicle’s battery have been extracted, processed or recycled in the US, or in a country with which the US has a free trade agreement.7  Notably, a vehicle containing critical minerals and battery components derived from any “foreign entity of concern” would not be eligible for the EV-specific credit.8   

An advanced manufacturing production tax credit under Section 45X of the IRC is also available for certain producers of critical minerals.  In order to be eligible, the taxpayer must produce the critical minerals in the US and the minerals must ultimately be sold to an unrelated party.  In addition, the Department of Treasury and Internal Revenue Service, in partnership with the Department of Energy, have announced the availability of up to $10 billion in tax credits under Section 48C of the IRC for projects that expand clean energy initiatives, including critical minerals refining, processing and recycling.  This credit is a one-time investment tax credit based on a taxpayer’s capital investment in a qualifying project, as opposed to the annual Section 45X credit, and eligible projects cannot claim both credits.

FDI; Committee on Foreign Investment in the US

Except for persons designated as “sanctioned” by the US Office of Foreign Assets Control and where national security matters are implicated, the US generally does not have significant restrictions on foreign ownership of US JVs. 

While many are familiar with the role of the Committee on Foreign Investment in the US (commonly referred to as “CFIUS”) in permanently or temporarily blocking traditional US investments by non-US persons where there are national security concerns, it is important to remember that CFIUS’ jurisdiction can also extend to US JVs involving a non-US person.  Furthermore, in terms of the scope of what comprises national security risk, on September 15, 2022, President Biden issued an Executive Order directing CFIUS to ensure that its review of transactions considered five additional risk factors regarding “evolving national security risk.”  This order has resulted in a sharpened focus by CFIUS on foreign investment in critical US businesses, and potential threat vectors to those businesses, including a broadening conceptualization of national security characteristics, sensitivities and concerns in comparison to past approaches.

One of the risk factors identified by the executive order was supply chain resilience, in connection with which CFIUS must consider a proposed transaction’s potential to undermine US supply chain resilience efforts and render the country vulnerable to future disruptions of key goods and materials.  Among the elements CFIUS must consider is the potential disruption of the supply of critical mineral resources, the degree to which a non-US person’s involvement in the US supply chain might endanger such supply, and the degree of diversification that exists with respect to alternative suppliers of such resources.  A link to our client update on the CFIUS executive order can be found here: https://www.mayerbrown.com/en/perspectives-events/publications/2022/09/cfius-risk-factors-expanded-by-executive-order.

Antitrust and competition law considerations

1. HSR and other Reporting Considerations

Market participants considering mining JVs will also need to consider US antitrust restrictions.  As with mergers with or acquisitions of existing entities, the formation of a JV can be subject to a mandatory filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”).  Assessment of HSR-reportability for JVs hinges on nuanced facts, including, for example, the value of the transaction, the size of the contributors, and whether the JV is formed as a corporation or as a non-corporate entity (e.g., LLC or partnership).  The formation of a JV is reportable if, in the case of corporate joint ventures, the contributors will hold a reportable amount of the voting securities of the new company (in 2023, over $111.4 million in value) and the contributor and JV meet certain size thresholds.  In the case of non-corporate JVs, it would be reportable if a contributor takes back a controlling interest (50% or more) and the JV and the contributor meet certain size thresholds.  (Note that only an entity with a controlling interest makes a filing in the situation of the formation of a non-corporate JV whereas multiple contributors could be required to make filings in connection with a corporate JV.)  If the JV is a cash only joint venture (i.e., formed as an acquisition vehicle), then certain rules may apply that would allow the parties to avoid an HSR filing.  Moreover, other exemptions may also apply to limit reportability.

The filing of the HSR form will trigger an antitrust review to determine whether the formation of the JV will result in a substantial lessening of competition between the contributors. The government will look at the degree of competition in any relevant product and geographic market and assess whether the contributors are significant competitors and whether the JV eliminates competition between or among them.  These reviews are highly fact-specific, both with respect to the assessment of competition in the marketplace and whether the terms of the JV restrict competition between the contributors.

2. Commercially Sensitive Information

The holding of interests by investors in mines (including through JVs) that compete in the same product and geographic area can also raise substantive antitrust law concerns in connection with obtaining and disclosure of commercially sensitive information (“CSI”).

Because investors are likely to have board or equivalent representation in the management structures of mining JV, as a result of their interests, they will also, typically, have access to the CSI of competing mines, including costs, pricing and other commercially sensitive information.

Investors in mining JVs are often engaged in the trading of a mine’s output, either in their own right under offtake arrangements, and/or in a capacity as a marketing or sales agent.  As a result of these types of activities, there is scope for a potentially anti-competitive sharing and use of CSI in relation to competing mines and more broadly, increased coordination in the market.

Practical solutions to such antitrust concerns have been developed in relation to mines and mine equity interests.  For example, the formation and governing document of the JV can impose procedures to ensure that CSI is not shared with investors that hold or manage competing investments.  And, the parties should use antitrust compliance training and programs during the life of the JV to help ensure that competition-related concerns do not arise.

Conclusion

In the high-stakes mining industry, effective JVs can lead to resource sustainability, technological innovation, and economic growth, but their success hinges on careful planning and a commitment to mutual goals.  The potential reasons for entering into a mining JV can be as varied as the characteristics of the JVs themselves.  Each JV arrangement presents a unique set of opportunities and challenges to the parties who, among other things, typically seek to align their interests, access, funding and specialized expertise in order to save costs, share risk and establish clear and robust rules of engagement for long-term cooperation.  Properly negotiated and documented JVs can be excellent structures to engage in long-term projects—such as mining operations—where cooperation and lasting relationships are critical to a project’s success.  In contemplating a mining JV in the US, investors, whether foreign or domestic, should consider involving legal counsel early on to assist with structuring and formalizing the JV and to align on the various US regulatory requirements and considerations.



1 While the definition of “critical minerals” varies between government agencies and regulatory schemes, a recent list included the following: aluminum, antimony, arsenic, barite, beryllium, bismuth, cerium, cesium, chromium, cobalt, dysprosium, erbium, europium, fluorspar, gadolinium, gallium, germanium, graphite, hafnium, holmium, indium, iridium, lanthanum, lithium, lutetium, magnesium, manganese, neodymium, nickel, niobium, palladium, platinum, praseodymium, rhodium, rubidium, ruthenium, samarium, scandium, tantalum, tellurium, terbium, thulium, tin, titanium, tungsten, vanadium, ytterbium, yttrium, zinc, and zirconium.  See IRC Section 45X(c)(6).

2 GM to help Lithium Americas develop Nevada’s Thacker Pass mine.  Reuter s.  https://www.reuters.com/markets/commodities/gm-lithium-americas-develop-thacker-pass-mine-nevada-2023-01-31/.

3 Ensure that Your Joint Ventures Meet Your ESG Goals.  Harvard Business Revie w.  Ensure that Your Joint Ventures Meet Your ESG Goals (hbr.org).

4 Limited partnerships tend to be more common in real estate or financial JVs.

5 An LLC can for tax purposes elect to be treated as a passive (disregarded) entity or as a regular corporation.  Where non-US LLC owners do not want to register as US taxpayers, they tend to elect regular corporation tax treatment or use a different US tax-payer holding company.

6 Vehicles placed into service before January 1, 2024 need only have 40% of the value of the critical minerals in the new vehicle’s battery satisfy this requirement in order to be eligible.

7 EVs placed into service between 2024 and 2026 can also receive an additional $3,750 tax credit so long as at least 60% of the value of the components contained in the vehicle’s battery are manufactured or assembled in North America (for a total of $7,500 available credit, which does not offset any manufacturing credit).

8 Guidance has not yet been given on the interpretation of “foreign entities of concern.”  For a more detailed discussion, see our recent client update on the proposed rulemaking of Section 30D.

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