investment agreement negotiation columbia university new york june 2014

Investment AgreementNegotiation

Columbia UniversityNew York

June 2014

Key Components - Preparation• Understand and know your counterparty• Full knowledge of the asset/project being

discussed• Comprehensive understanding of State’s

own goals and objectives• Recognition of broader framework• Other ministries• Discussion with local stakeholders• Establish the negotiating team• Choose your advisors

The Counterparty

• Where are they from?• Who are the real owners of the potential

investor?• What will their objectives be?• Who will be the negotiating team?• What is the potential investor’s history in:

– The country– The region– Emerging markets globally

• What are the key drivers and pressures faced by the potential investor?

The Project

• How much internal knowledge and information on the project is there?

• Does the team have a solid grasp of the underlying value of the asset?

• Have technical advisors been involved?• Have financial models been prepared?

– technical input in relation to quality of the resource

– mine methods– economic feasibility

The Team

• Who will lead the process from the Government side?– importance of key contact– authority and accountability

• Are all relevant ministries represented?• Ensure clear internal decision making

process?– understand role– relative authorities– who ultimately decides

The Process

• Clear timelines• Control of process

– Agenda– Timeframe– Location– Drafting of document

• Incorporation of views of other interested stakeholders– NGOs– Communities

“Winning” and “Losing”

• Difficulty of comparing contract terms– Each situation is unique– Different markets– Different industries– Third-party interests– Changing interests over time– Periodic review

• Difficulty of negotiating long-term contracts– Importance of a thorough understanding of

business interests

“Winning” and “Losing”

• Power of precedent– Difficulty of accepting “less favorable terms”– Involvement of multiple constituencies

• Negotiation as a means to an end– Economic, political and other values inevitably

evolve over time– Contract should permit changes, where

appropriate

Bargaining Positions

• Industry structure– Importance and availability of natural resource– Number of interested investors– Barriers to entry– Required capital investment– Access to capital– Access to markets– Market fluctuations– Nature of investor interest in resource

Bargaining Positions

• The host country– Quality of natural resource– Development of technology for development of

“scarce” resources– Costs of development and extraction– Perceived risks– Host country experience and skill– Administrative expertise– Economic incentives

Renegotiation

• Shifting psychologies– Lifting the veil of uncertainty– Initial interest in concluding any deal– Terms develop in government’s favor

• Rationale for renegotiation• Risks of initiating renegotiation

– Investor fright– Access to technology, foreign markets

Problems of Long-Term Contracts

• Mining contracts are extremely complex, long-term contracts in a world of change and imperfect information– It is almost inevitable that one or both parties

will find terms in the contract to be unacceptable

– The contract may be considered a framework for an ongoing relationship, rather than the precise terms of that relationship

– The bargaining power of the parties is likely to change over time

Problems of Long-Term Contracts

• Provisions for change– Automatic, nonnegotiable adjustment of

specified terms– Provisions for future negotiation of selected

terms– Renegotiations not contemplated by contract– Negotiations are likely even when they are not

triggered by specific provisions

Legal and Practical Considerations

• Constitutional and legislative right to renegotiate

• Impact of political environment• Impact on international relations with

foreign countries• Perspectives of existing foreign investors:

– mining and resource companies– international financial institutions– international commercial lenders

Legal and Practical Considerations

• Perceptions of potential foreign investors • Communications strategy• Legal position (e.g., scope of any existing

investment treaties, general principles of international law, etc.)

• Arbitration risks and likely outcome

Typical Revisions

• Area for concession– Automatic reduction

• Increased equity ownership• Most-favored-company provisions

– Automatically incorporates more favorable provisions from other contracts

– Restricts government from negotiating freely with other companies

– Inconsistent provisions among contracts• It is difficult to consider any provision in isolation

from the rest of the contract

Typical Revisions

• Most-favored-country provisions– Automatically incorporates more favorable

provisions from other contracts– Even more difficult to administer than most-

favored-company clauses• Periodic Review

– Typically automatic review of particular provisions at specified intervals

– Alternatively, contract could require thorough review to ensure fairness to all parties