CANADA ENACTS ANTI-CORRUPTION LEGISLATION FOR MINING INDUSTRY
The Extractive Sector Transparency Measures Act, proclaimed in force on June 1, 2015, has been widely lauded for finally bringing Canada up-to-speed with the European Union, the United Kingdom, Norway, and the United States in promoting transparency and accountability in the extractive sector by requiring mandatory reporting of payments made to any government or body performing a governmental function in Canada or abroad. According to the federal government’s website: “The Extractive Sector Transparency Measures Act (ESTMA) was enacted by the Parliament of Canada in December 2014 and came into force on June 1, 2015.
“The Act requires businesses to publicly report certain payments they make to all levels of government in Canada and abroad in relation to the commercial development of oil, gas and minerals. The purpose of the ESTMA is to deter corruption in the global extractive sector by making government revenues from natural resources transparent to the public. The reports will be made available on publicly accessible websites by reporting businesses, and a link to every report submitted will be available on the ESTMA website.
“The Act responds to a commitment that Canada made at the 2013 G8 Leaders’ Summit; where leaders agreed to raise global standards of transparency in the extractive sector, reduce the potential for corruption and ensure that citizens benefit fully from the extraction of natural resources.”
The ESTMA is also significantly broader than other countries’ laws in its extraterritorial reach, its application to private companies, and the range of recipients for whom reporting is required. It applies not only to Canadian public companies, but also to public companies and large private companies that have virtually any assets at all or a place of business in Canada. From the perspective of private companies, the legislation applies only to those with C$20 million in assets, C$40 million in revenue or 250 employees. But these thresholds are determined with reference to an entity’s consolidated financial statements, the intention being to include the collective numbers of corporate families in making the determination.
Conversely, TSX Venture Exchange companies are not caught by the ESTMA. In Québec, however, the Liberal government has introduced Bill 55, which mirrors the ESTMA closely but would close some of the gap created by the omission of TSX Venture listees from federal scrutiny by requiring businesses operating in the mining and oil and gas sectors in the province to declare all payments made to government bodies and eventually to Aboriginal communities.
However that may be, companies that are covered by ESTMA will have to deal with a unique spectrum of payments because the legislation’s definition of “government” is broader than the definition in legislation elsewhere. Both monetary and in-kind payments must be reported, whenever the aggregate, calculated on a per-project basis, exceeds C$100,000. The categories of payments include taxes; royalties; rental, entry, license and permit fees; production entitlements; bonuses; dividends; and infrastructure improvements.
Reports must be filed within 150 days of the end of each financial year and include information to be established by regulation. Failure to do so, making false statements, or structuring payments with the intent to avoid reporting requirements, will expose companies to a C$250,000 fine, with an additional C$250,000 for each day that the violation persists. With some affected companies operating in as many as 100 countries, the legislation has the potential to be onerous in terms of administration and reporting.
As it turns out, Canadian, US and EU regulators are working on a common template, although it’s uncertain whether they’ll be able to thrash one out. The ESTMA also contemplates an “equivalency” measures that would allow companies to satisfy Canadian reporting requirements by filing reports prepared in accordance with commensurate reporting requirements in other jurisdictions.
EXPLORATION OPTION AGREEMENTS
Exploration option agreements negotiated by sophisticated parties mean what they say and nothing more, says the British Columbia Court of Appeal.
Such agreements are common in the mining industry, but the decision in American Creek Resources Ltd. v. Teuton Resources Corp. is bound to change industry practice for drafting them.
Typically, exploration option agreements involve a company that owns a property granting another company the option to earn an interest in the property by exploring it. The agreement usually prescribes the amount of the expenditures that must be made, but the description of the expenditures included can vary from deal to deal.
Here, American Creek sought to enforce its option to acquire a 51 per cent interest in certain mining claims that Teuton owned in northwestern BC. The company demonstrated that it had spent the C$5 million mandated by the exploration agreement, but Teuton maintained that the expenditures were unreasonable and refused to transfer the interest.
The court ruled, however, that absent a standard in the agreement itself, such as reasonableness, it would not impose a qualification on the expenses. American Creek’s only obligation was to make valid “exploration expenditures,” which it had done. Consequently, no inquiry into the reasonableness was necessary and Teuton was obliged to transfer the 51 per cent interest to American Creek. The upshot is that, in order to meet its exploration obligations under a standard option agreement, an optionee must only show that it has incurred expenditures in good faith regarding exploration of mineralization at the property.