China slowing down? Don’t worry about it
By Drew Hasselback
Earlier this month we saw some figures that suggest China’s rapid economic growth is starting to slow. China’s second-quarter GDP rose by 7.6%, slower than the 8.1% reported in the first quarter.
The slowdown in headline GDP might shock those who are banking on China’s future prosperity to sustain commodity prices. But Canadian lawyers doing business in that part of the world are less worried about it.
For one thing, Canadian lawyers have learned not to focus too narrowly on China, but rather to target the business opportunities available through Asia. “Your focus is on China because of the GDP numbers, but this is Asia, and the Koreans are still very involved in this,” says Jay Kellerman, a mining lawyer with Stikeman Elliott LLP in Toronto.
For another, Canadian lawyers have come to understand that business flows to and from China can be choppy. Much of Canada’s resource business is built on the foundation laid by the oomph Chinese demand has built into commodity prices. News of a slowing Chinese economy might set off alarm bells for an already nervous resource industry — but this doesn’t necessarily translate into concerns over deal flow.
And cue the events of this week. Things seemed quiet, and then bam, CNOOC announces a US$15.1-billion friendly, all-cash bid for Nexen Inc. There’s plenty of work making the rounds. CNOOC’s legal advisors are Stikeman Elliott LLP and Davis Polk & Wardwell LLP, while the Nexen legal team includes Blake Cassels & Graydon LLP and Paul, Weiss, Rifkind, Wharton and Garrison LLP. Advising Nexen’s board of directors are Richard A. Shaw Professional Corp. and Burnet, Duckworth & Palmer LLP.
There are other reasons for Canadian miners not to fear a slowing Chinese economy. Brett Kagetsu, a partner with Gowling Lafleur Henderson LLP in Vancouver, notes the Chinese economy is still defined by long-term issues, such as mass urbanization. “Despite the fact there may be a current slowdown, they all still see growth in the need for resources in the future. I would think they’re maybe looking at the current market as a good opportunity, given the lower prices of the stocks.”
David McIntyre of Norton Rose Canada LLP in Toronto says despite the slowdown in the headline number, the Chinese economy is still growing at a significant rate. That classic demand for raw materials remains a source of business, but lawyers are also doing lots of non-resource deals as the Chinese economy expands and diversifies. “The legal work we’re doing feeds into long-term factors.”
China is pushing to deploy its foreign currency reserves away from U.S. treasuries and into hard assets, Mr. McIntyre adds. The Chinese economy has also been creating a steady stream of large companies that aim to operate on the global stage. “There’s been a real push to make those companies internationally important firms.”
One of the biggest mining cases in recent memory is Goldcorp’s successful defence to a legal challenge brought by Barrick Gold Corp. over the El Morro mining project in Chile.
The trial decision, issued late last month, offers interesting lessons to anyone who plans to build a right of first refusal into a shareholders’ agreement. In particular, expect to see a lot of language creep into shareholder agreements that aims to prevent parties from pulling off the manoeuvre that enabled Goldcorp to secure control of the property.
Here’s what happened. Before 2009, El Morro was 70% owned by Xstrata and 30% owned by New Gold. As you’ll often see in such arrangements, each company had a right of first refusal to buy the other out. In 2009, Barrick reached a deal to buy Xstrata’s stake, conditional on New Gold not exercising its right to match.
So if the original set up involved Xstrata and New Gold, how does this wind up being a despute between Barrick and Goldcorp?
In 2010, Goldcorp struck a deal to lend New Gold the money it needed to match Barrick’s offer for the Xstrata stake. New Gold used the loan to exercise its right of first refusal to buy out Xstrata, then turned around and sold 100% of El Morro to Goldcorp. The mining team at Cassels Brock and Blackwell LLP advised Goldcorp, and they’re still pretty proud of this deal.
Back to the case. Barrick sued, basically arguing that the shareholders’ agreement didn’t give New Gold the power to transfer the right of first refusal to a third party. The trial took 35 days and resulted in a 229-page ruling by judge Herman Wilton-Siegel of the Ontario Superior Court of Justice. The judge found that a right of first refusal is something akin to an option. And I use the word akin, since the judge found that Goldcorp never actually acquired the right of first refusal, because the deal was structured in such a way that it was still New Gold that exercised the right.
In the future, expect to see all future right of first refusal contract provisions build in language that is designed to prevent someone from doing a Goldcorp.
A long time ago we told you about new U.S. Securities and Exchange Commission rules for mining companies that emerge from the Dodd-Frank Wall Street Reform Act. The proposed rules concern disclosures and reporting obligations for miners who work with so-called conflict minerals or who make payments to foreign governments.
Kevin Cramer of Osler, Hoskin & Harcourt in New York tells me the SEC has scheduled an “open meeting” for Aug. 22 in Washington to consider adopting those rules. Point is, if your mining company isn’t in compliance with Dodd-Frank, you’d better hurry up.