FOCUS POINT: UNSPOKEN EXPECTATIONS
20 February 2012,
WITH the ongoing uncertainty in the euro-zone and continued volatility in the market, constrained access to credit and equity looks likely to continue in 2012.
For junior explorers who are at a pre-production stage and have not already obtained binding funding commitments, this represents significant risk.
While continued international demand for commodities provides some upside amid this uncertainty, issuers need to ensure that they are aware of all of the terms of any potential funding arrangements, both written and unwritten, before completing any significant funding arrangement.
Similar to any unspoken expectations that you may have regarding a substantial investor’s support of any future capital raising, a potential investor will also have its own set of unspoken expectations. Like any business arrangement, the success of such an investment will lie in ensuring that the key objectives of both parties are met. Having a clear understanding of what these are for your potential partner will ensure that you are both in the best starting position to achieve this.
Several of the key areas that you may benefit from discussing upfront with any potential investor will include the party’s expectations as to:
Even if the terms of whatever contract entered into do not explicitly provide for preferential participation in any future capital raising (whether debt or equity), the fallout from an unwritten expectation of this is equally damaging to the relationship.
Ensuring that any investor has a clear understanding of your future funding needs, and where you expect that this funding may be drawn from is a critical first step. Similarly, discussions regarding the composition of your share register, together with any views on how the composition of your register may be improved (for example, a desire to encourage a particular strategic or institutional investor mix) may help avert any future feelings of disgruntlement.
With the increased strain on credit, obtaining capital from an investor which has a mixed form of return (for example, a combined debt and equity investment which provides an investor with (some) certainty of a regular coupon payment together with the upside of any capital accretion), are increasingly popular. So, too, are investments from strategic investors who may require committed off-take arrangements or other supply agreements as a pre-requisite to their investment.
While these committed off-take/supply arrangements will often be explicitly provided for, there may also be latent expectations that remains unspoken. This is particularly the case where the investment is from a larger conglomerate, having investments in various areas, and for which you may need to appreciate the extent to which such ancillary supply arrangements may have formed part of the internal business case for the initial investment.
To the extent that it does not otherwise undermine any competitive advantage or any existing confidentiality arrangements, ensuring that any potential investor is aware of any intentions you have regarding the identity of any key suppliers to and/or customers of your business (to the extent that they are known) will help you to identify and address any latent expectations as early as possible.
While it is commonly expected that a substantial investor will obtain a position for a nominee on the board of a company, it is prudent to ensure that any representation arrangements are clarified upfront, as would seemingly be testified by the board of Altius Mining Limited (AYM) following the recent public dispute with its major shareholder, Xiao Jing Wang, in relation to the different expectations for board representation following his investment into Altius.
Ensuring there is a common understanding of the minimum expectations as to the capability and level of engagement expected from any representatives is also prudent. Such an understanding serves both parties, as having a non-English speaking representative (without a translator) who does not have a rudimentary understanding of a P&L and/or balance sheet is as ineffective as a representative (with a limited capacity to express the views of, and report back to, the relevant investor) as they are frustrating to the remainder of the board.
While it may not be appropriate to include any of these ‘soft’ expectations in a formal agreement or the like, if both parties have a mutual understanding of what these expectations are upfront this will assist in reducing any subsequent conflict and ensure that the relationship achieves each party’s respective goals.
While you may view that any written contract between the parties contains all of the key terms of the relationship, many people see such a contract as merely the start of the relationship. Appreciating this approach may assist in recognising how a difference of understanding may arise and, more importantly, how to avoid it.
Lastly, while having an understanding of the key ‘unwritten terms’ for each party in any engagement is critical, it is equally important to keep a track of and understand how these ‘unwritten terms’ evolve over time, which can only be done through ongoing communication by both parties.