Contact : Lindsay Newland Bowker LNBowker@BowkerAssociates.org Date July 27, 2018
Brazilian mining law wants foreign investment but not foreign owner control of its mineral resource extractions. From a liability point of view Brazilian law sets up a circular firing squad in the context of the two investor lawsuits against BHP, one still active one recently settled with no admission of liability. They want foreign investment. They need the exchanges for the equity capital to develop and operate its large mines but they place themselves and their citizens ahead of the interests and protections of the individuals and institutions who provide the essential equity capital. (Sounds good but it hasn’t done well protecting its citizens either). Brazilian law explicitly states that the settlement of its demands is without regard to impacts on investors.
This sets up a drama that may ultimately not serve Brazil well with current and future investors when the specific provisions of its law come to the fore in the context of the still active Australian Class investor action suit . ( Just days ago the earlier filed New York suit was settled without admission of liability by BHP for $50 million precluding the requested jury trial in which the issues discussed here may have come to the fore). There is a moral tale here too for nationalism in general and for aggressively protective but not ulitmately effective local law ( eg the well aimed but very poorly framed Sierra Club “Prove It Statute in Wisconsin). All mining these days takes place in a global context of available capital and a dwindling cadre of well trained technical resources. All national and local laws operate in a context of international or other law that has its own standards and remedies.
The fatal flaw in Brazils structure with respect to attracting that foreign capital is that it expects to be able to successfully separate responsibility and control, a fatal flaw at the “get go” in terms of sound risk management.
Source ASX BHP Price July2015-July2018
“BHP chairman Jac Nasser told shareholders at this week’s BHP Billiton AGM: “This year will go down as one of the most difficult in [BHP’s] 130 years.” Not only is BHP facing vastly reduced commodity prices, since the disaster investors have heavily sold down BHP shares to the level of ten years ago.”The Conversation.com November 2015
THE SEPARATION OF RESPONSIBILITY AND CONTROL UNDER BRAZILIAN MINING LAW
Under Brazilian law the 50%-50% joint ownership of the Samarco, makes BHP a “silent /deep pocket ” partner forbidden by law to have any management control. Brazilian law does not limit liability to the ownership percentage of a joint venture. Which ever partner can pay does pay if a partner or the owned subsidiary can’t. Brazilian law supersedes whatever agreement Vale & BHP may have. It is structured to insure the government and Brazilian citizens are held harmless and reimbursed even at the peril of value to all investors, a specific provision of Brazilian law. ( a provision potentially essential to all mining law but only in the context of an entire legal framework that actually works. At the scale of $50 bn in claimed damages, BHP’s investors are as at risk as Vale’s. Their exposure may even be greater than Vale’s as BHP is the deep pocket in terms of revenues and market cap. ( Vale has a current cap of $us76 bn. Samarco in essence no longer exists).
“Corporate and industry reputations are big losers. It is estimated the disaster has affected 15 million people. “The Conversation.com
Under law only Vale, the “native” Brazilian company was allowed any management control. To complicate matters further with respect to BHP’s opportunity to manage its liability exposures in the deal within the constraints of Bazilian law, Vale was found by the government to have actively contributed to the failure through unauthorized use of the Fundao for deposition of their own high slime tailings from their adjoining facility. It is not clear whether this arrangement was disclosed in the JV agreement but it was right there in the plans and specifications for the Fundao: a direct pipeline for deposition from the Vale site as needed. It seems impossible to believe BHP was unaware, that they would not have had “their people” at least review the mine plan. If I were advising a JV partner in this situation I would have built in specific compensation from Vale for the benefit of that use and required an enforceable hold harmless and indemnity from Vale for all losses and damages raising from operations. As Risk Manager for BHP I would have insisted on a right to independently assess all inspection reports and consultant reports including the ITRB and I would have insisted on a “buy out” escape hatch. ( I would have invoked it at the point Vale approved the go ahead on the Samarco expansion fully aware there was not adequate capacity at the Fundao and that there was capacity on site and no viable plan to create capacity.)
In effect, under Brazilian Law the lion’s share of damages could accrue to BHP and at the levels at issue, a total of $50 bn that will continue to have a major impact on BHP as a whole until the payment arrangements and amounts are firmly settled. Even behemoth BHP is not big enough to absorb the lion’s share of a $US50 bn legal demand for payment. The Investors in the US settled for only $US50M. Australia represents a demand for another $US25bn (more or less). BHP’s market cap is only $US133 bn. Even at 50% of Brazil damages the combined total arising from a basically insignificant operation (in the scheme of revenues from the whole BHP portfolio ) presents liabilities which are as much as 38% of present market cap. That in turn will have, and has had, a major impact on the value of BHP shares. Investors have in fact been, and will continue to be, under the shadow of the Fundao failure for two more years or until BHP’s share on the $US50bn in Brazilian damages is resolved in law.
“Last month, the company reached a deal with Brazilian authorities to push back a $47.5bn civil lawsuit for two years while both sides negotiate a settlement”.
A circular firing squad.
Some shots already fired.
Some wounds already suffered with slow and incomplete “healing”.
The recently announced Australian class action suit against BHP estimates $AU25billion in ASX investor losses between November 5th, 2015 ( the date of the largest mine failure in recorded history ) and November 30th, 2015, the period of the class action claim brought by Phi Finney McDonald. The insert chart above shows both values and volumes traded. Of course this suit and the now settled American parallel are under applicable securities law and have nothing to do with Brazil’s laws and structure. However, the generic standards for adjudication of investor lawsuits don’t work well for mining especially when paired with a legal structure such as exists in Brazil. In the U.S. version of the BHP investor suit the ruling disallowing a fraud charge under section was based in part on assumed control by BHP when in fact Brazilian Law specifically disallows control by foreign owners.
If the non control provisions of Brazlian law are found to constitute a complete defense for BHP under security law, investors are possibly squeezed out again. All await the outcome of both the US and Australian investor suits.
The structure of law determines the structure and path for a cause of action . Both the U.S. & Australian class action investor suits rely on similar securities law requiring immediate continuous disclosure ( not just waiting for the next annual report or quarterly review) of material adverse conditions which might affect value. In the US case under US law the standard for a securities fraud claim requires that:
“the plaintiff sufficiently alleges that the registrant had ‘actual knowledge’ of the relevant trend or uncertainty. [A]nalysing SEC guidance, the court held that the regulation requires disclosure only if there is a substantial probability that the trend or uncertainty would come to fruition and that such occurrence would have a material impact.”
The fraud charges (in a very flawed ruling) were rejected but other elements allowed to stand in the US proceeding.
The total liability just from the governments Brazil damage claims and the two investor lawsuits ($us100 bn more or less ) represents about 1/2 of the combined market cap of these two top 40 behemoths ($us200 bn more or less). The two active suits will drag on for some time. Hard to put a smiley face on the situation for either Vale or BHP, for their investors, for the displaced and made homeless, for the survivors of the 19 killed, for the long term loss of livelihood, for the irreparable generational loss of essential natural resources.
Sticky Wickets of Securities Law Applied To Mining
“Substantial Probability” and “material impact” are the sticky wickets of securities law when applied to mining. It is hard to even a imagine that a plain vanilla interpretation of these terms could be contrived or applied to mining even though the history of the TSF from its failure at opening and over its entire and short life continuously built to a fully formed fatal event months before the actual event according to the miners own commissioned cause of failure report. Even though it was known a failure would wipe out Bento in minutes and cause massive damage. Even at the moment the failure was fully matured, if asked, a Vancouver mining consultant would likely spout some ridiculous non applicable probability theory “demonstrating” that the probability of failure was less than 1 in 1million. MAC would back them up. ICMM would back them up. No one in court would know enough about Poisson Distributions and probability theory to know it only applies to “acts of god” , to truly random events not to the cumulative and inevitable results of ignoring one warning after another, making one decision after another not in line with best knowledge or best practice. All would be wrong but it wouldn’t matter because securities law doesn’t match up with mining realities and no one involved in a securities action knows beans about probability theory or poisson distributions….or mining.
Securities law standards on breach of duty to investors just don’t work for mining.
Investors again will most likely get the short end of the stick. That is already suggested in the $US50 M U.S. settlement.
The BHP Billiton opinion [in the NY case] may be found in BHP Billiton Limited Securities Litigation, 276 F Supp 3d 65 (SDNY 2017). The case is currently in the discovery phase.
The recently announced Australian investor class action suit relies on similar provisions in securities law has has similar vulnerabilities when applied to mining sector investor claims.
The PHI Finney McDonald suit, financed by the same party bringing the US investor suit (G&E KTMC Funding).will allege that BHP knew, or should have known, there was a significant risk the dam would collapse as early as October 2013. Despite knowing this information, BHP failed to ‘immediately disclose’ this risk to investors as required under § 674 of the Corporations Act 2001 (Cth) (the Act) and Australian Securities Exchange (ASX) Listing Rule 3.1.
The complaint will also allege a claim against BHP for engaging in misleading or deceptive conduct contrary to § 1041H of the Act.
In this post we are mainly focused on how Brazilian mining Law played a role in events leading up to the failure and failed to bring about a timely and effective mobilization in response to the failure. Arresting executives as “environmental criminals” doesn’t help villagers who have lost everything.
The effects of Brazilian Law on the standing of investors to recover actual losses is not insignificant and should not be minimized or overlooked. Equity capital raised though the major exchanges is essential to production of the minerals the world actually needs to function. Those acquiring equity need to know that the company is responsibly managing all risks that may affect value. How the SEC and Australian counterpart apply securities law to the BHP investor suits could further chill investor enthusiasm for the metals sector and the outcome may point to a need for exchanges to revise standards as applicable to minerals extraction and finishing. BHP’s defense will obviously cite their legally limited role as a “silent partner”.
Brazilian Law serves Brazilian government interest very well or rather aims to do that above all else but it may end up working to shield BHP from accountability to investors . It has already failed its people and failed the environment.
Financial Review 2016
Brazils law and BHP’s corporate approach to the unique liability it created for BHP and its investors are co responsible for whatever economic damages ultimately accrue to BHP. Separating responsibility and control is never a good idea in risk management /loss prevention terms yet there were at the outset remedies possible within the terms of Brazilian Law that would have reduced BHP’s total liability and better protected its investors. In fact belatedly BHP has initiated an Non Operated Joint Venture Program policy that does that. It applies to BHP’s other existing non owned joint ventures Antamina, Cerrejon and Resolution and will apply to the vetting of any new positions where responsibility and control are separated ( mining by contractor..also not a sound idea in risk management terms).
BHP SPECFICALLY RECOGNIZED INVESTOR & CORPORATE LIABILITIES IN NON OPERATED JOINT VENTURES
Although it is not referenced in the particulars of the present investor class action suit by Phi Finney McDonald on behalf of a class of 3000 investors, BHP did recognize the liability of the arrangement could be extensive for its investors and for the company as whole.
Up to and including the Samarco failure BHP recognized the liability and exposure of NOJV’s but did nothing about it.
“Our non-controlled assets may not comply with our standards. Some of our assets are controlled and managed by joint venture partners or by other companies. Some joint venture partners may have divergent business objectives which may impact business and financial results. Management of our non-controlled assets may not comply with our management and operating standards, controls and procedures (including health, safety, environment). Failure to adopt equivalent standards, controls and procedures at these assets could lead to higher costs and reduced production and adversely impact our results and reputation. Risk Factors 2009 annual report https://www.bhp.com/~/media/bhp/documents/investors/reports/2009/annualreport2009.pdf?la=en pdf p 12
Some of what the new program aims at will help avoid getting in another hole as deep and dark as BHP embarked on with Samarco and Vale. But it also shows BHP had plenty of room within Brazilian law to protect investors and excercise more influence to protect Bento and the entire downstream community.”2018 non operated joint venture oversight https://www.bhp.com/our-approach/operating-with-integrity/non-operated-joint-ventures
“Non-operated minerals joint ventures
Our non-operated minerals joint ventures include Antamina (33.75 per cent), Cerrejón (33.33 per cent), Resolution (45 per cent) and Samarco (50 per cent).
Following a review of governance at our non-operated minerals joint ventures (NOJV), we have focused on the following actions.
Risk management and processes: a global standard has been developed that defines the requirements applicable to all of our NOJVs. These minimum requirements are consistent with BHP’s standards for our operated assets, and establish a framework for identification and management of NOJV risks, including identification of governance risks. We are working closely with our NOJV partners to establish priority areas, communication strategies and work plans in line with this global standard.
Accountability and structure: the management of all of our NOJVs has been centralised in our Minerals Americas asset group. We have created a NOJV leadership team and supporting team, who are a single point of accountability with responsibility for all NOJVs.
People: we have added to the capabilities of our teams to manage the risk and opportunities at each NOJV. Further resources have been allocated to provide functional support, and for projects, governance, and planning. This dedicated NOJV team of subject matter experts provide support to the NOJVs, enabling strong management of risk and performance and contributing to discussions on governance improvement and value generation opportunities.
Our focus for FY2018 is on our governance processes for NOJVs, including:
reviewing the effectiveness of risk management processes to drive improvements and share good practices;
·further development and implementation of specific standards for NOJVs, based on best-practice governance benchmarking;
· improving governance and assurance processes across the NOJVs”.
Sounds great on paper and would endorse as an essential strategy for all non operated joint venture positions. Certainly every non native JV partner in Brazil mines needs this.
The details and the effectiveness lie in the implementation not in the words, however. On that no details as yet.
WHAT DID BHP KNOW & WHAT DID THEIR AGREEMENT WITH VALE PROVDE AS REMEDY
It has been assumed and argued by NGO’s and claimants and critics that because BHP had a representative on the Board of Samarco that it was fully aware of all the events that created, incubated and finally matured to the largest mine failure ever in human history. Having served on a few boards (Government Regulation and professional society), I know that Board members get what the corporate body thinks is needed to keep them from getting in the way or to secure a positive vote on a particular issue. Board members are not part of the day to day deliberative process. They don’t automatically see all information known to the operators & managers. But on all boards I have served on, it is possible to get any records requested and to have influence, even decisive influence on how that information should be acted on.
It is reasonable to assume that BHP always had the right to review any documents, see the ITRB reports, Inspection reports, opinions of outside consultants etc. BHP is doing that now for all non-operated joint ventures. It seems it just didn’t think to do that in the course of co ownership of Samarco up to the date of failure.
BHP’s revenues less acquisition cost less judgments will make the project a huge net loss.
Having explicitly recognized the liability to the whole company and to investors, in risk management terms BHP committed an error of mission in not doing what it could all along to protect itself and investors.
Not knowing is not a defense in common law.
Not having management control is not a defense
It had a recognized liability of acknowledged large consequence.
It took no action to reduce or eliminate the risk.
Not knowing is a defense, possibly, in securities law.especially as Brazils law forbids BHP’s management control or direction.
There is no place to hide terms of justice.
There is no large ground on which to launch a defense asserting there was nothing BP could do to affect the outcome.
Depending on how it is framed, the particulars of the Phi,Finney McDonald may give them considerable ground as it reportedly asserts witholding of information on warning signs about the dams condition. The negligence seems rather to be BHP didn’t ask or care even though it had specifically acknowledged the liability in its annual report.
The key issue, it seems to me, was in what they chose not to know or try to effect. But that may not be at issue in the lawsuit.
Depending on the particulars, BHP may have a winning defense.on that one at least.
WHO IS SERVED BY BRAZILIAN LAW
I just peer reviewed a paper mapping how many suits have resulted from the Samarco failure, through what avenues within law these suits and claims have been advanced and against whom. An important endeavor because as we see Brazilian Law did not work at all to prevent a completely preventable loss. (In that article I saw no reference at all to suits against the government) (We frequently say “all tailings failures are failed public private public partnerships”)
Brazilian Law clearly has not worked to mobilize relief and restitution for an entire village decimated by the wall of fast moving sludge & debris and soils pulled into the flow by its force. It took three years just to get the long demanded, long resisted upfront $US5 bn mobilization money agreed to and paid, the bulk of that to the Renovo Foundation under miner control not to help claimants directly.
We are three years past a responsible reasonable mobilization & response effort.
The law, created in 2010 as part of privatization of its mineral sector, did do very well protecting Brazil itself against abandonment through bankruptcy or otherwise:
(1) Brazilian law does not allow transfer or dissolution of property that has an unresolved ,unfunded public damages.
Every wise legal framework should have his same provision
(2) Brazilian law asserts joint and several liability that extends to non-operated JV partners . Liability does not stay with some single purpose subsidiary easily just extinguished by bankruptcy. The bankruptcy of a subsidiary does not extinguish parent company obligations. (Every mining statute should have that provision)
(3) Brazilian Law asserts strict liability when extensive damage has occurred. There is no defense. The financial responsibility is complete and without recourse ( can’t endorse that one as written but a version of it could and should be crafted consistent with common law principles and established case law on strict liability e.g. on facilities with a high hazard rating)
(4) Brazilian law forbids foreign control but recognizes it is deep pockets and foreign dollars needed to develop Brazils’ resources. It is a have your cake and eat it too statute. We don’t endorse or recommend that. The objective should be to attract the brightest and the best for all operations.
(5) Brazil holds itself harmless under law from any and all damages arising from a mining operation ( ie it transfers 100% of liability to owners whether controlling or not. We don’t recommend or endorse that. The first obligation is to its people. If it is necessary to lay out fund for the protection of its people especially an entire displaced village..that should come first.i
All of this is at work and not helpful to BHP in getting out from under what could end up being the lion’s share of damages. The total even on an equal 3 way share makes the whole venture a huge net loss.
We shall see.