Considerations when structuring equity investments with Indigenous organizations

Torys Quarterly: M&A Trends 2021

New infrastructure projects will be an important part of Canada’s economic recovery from the pandemic.

These projects, together with the expansion of government programs aimed at reducing barriers to access to capital for Indigenous communities, will create more opportunities for Indigenous equity participation. Structuring successful and mutually-beneficial long-term equity ownership arrangements between Indigenous and non-Indigenous participants requires a change in mindset about the value each party brings to the relationship, as well as careful consideration of the unique features of the project, the business opportunity, and the interests of affected communities. These opportunities, together with key structuring considerations for equity investments with Indigenous organizations, are discussed in this article.

Advancing Indigenous equity ownership opportunities

Participation by Indigenous communities in the “economic” aspects of infrastructure projects is becoming increasingly common. Often referred to as “economic reconciliation”, this participation is evolving from benefit and royalty agreements to direct equity ownership. Equity ownership allows Indigenous groups to share in the commercial benefits of an infrastructure project, which leads to a myriad of positive results. These include better alignment of interests among Indigenous groups and non-Indigenous project participants, an opportunity for Indigenous entities to directly influence decision-making over critical infrastructure projects, and a basis and framework for ongoing consultation in relation to a project.

Indigenous equity ownership in Canadian infrastructure projects across a range of industries is a growing trend, as demonstrated by a number of recent announcements including:

  1. the federal government’s announcement in February 2020 that, further to a multi-step engagement process announced in 2019, it is launching a new series of consultations with Indigenous groups to determine how they may take part in the ownership of the Trans Mountain pipeline and expansion project; and
  2. the announcement by the Alaska to Alberta Rail (A2A) project in November that it is committed to making 49% of the equity in the A2A project available to Indigenous communities1.

The increasing frequency of Indigenous equity ownership is unsurprising given that Indigenous equity ownership can complement the consultation process: projects that are economically beneficial to Indigenous communities help align the interests of such communities with industry proponents (for a detailed discussion, see “Getting projects built during the pandemic: The continued importance of relationships with Indigenous peoples”, and our “Getting big projects built in Canada” webinars of November 10, 2020 and November 24, 2020, here). The governance framework implemented through equity ownership can also provide Indigenous partners with influence over business decisions that impact their communities, and the opportunity to control and profit from resource development.

Government programs announced in recent years have assisted Indigenous economic participation by reducing barriers to access to capital through the provision of loan guarantees and other financing instruments in support of the capital funding obligations associated with the participant’s equity ownership. For example, the Alberta Indigenous Opportunities Corporation’s (AIOC) mandate is to provide up to $1 billion in loan guarantees to Indigenous groups for the purpose of investing in natural resource projects. The first such loan guarantee was granted this past fall to a consortium of six Alberta First Nations to enable their equity participation in the Cascade Power Project, a 900 MW combined cycle natural gas fired power plant located in Edson, Alberta. Increasingly, there are calls for more of these types of programs, including for a national loan guarantee program akin to the AIOC and the previous Ontario loan guarantee program.

Structuring considerations

As with any partnering arrangement, there is no “one-size-fits-all” when it comes to structuring equity investments between Indigenous and non-Indigenous investors in infrastructure projects. It is vital to assess early on the overall interests, objectives, drivers and goals of each participant to ensure commercial negotiations result in a successful, long-term partnership built on mutual respect, trust, and understanding. Key factors include:

Structuring equity participation levels, including initial funding and changes in equity participation levels over time

  • If initial funding of the Indigenous equity investment is being provided under a government loan program, the partners may wish to structure the partnership such that there is a minimum rate of return to support the Indigenous partner in servicing its loan obligations.
  • For infrastructure projects, where large capital commitments may be required to fund construction and future expansion of the project, consideration should be given to whether funding flexibility is required. For example, the industry proponent could be permitted to fund all or a portion of the Indigenous partner’s capital commitment, on the Indigenous partner’s behalf, by way of a low-interest loan that could be paid back via distribution sweeps, dividends or similar funding mechanics.

Implementing an appropriate voting and governance regime to recognize the valuable but different skills and knowledge brought to a project by both Indigenous and non-Indigenous investors

  • Indigenous partner(s), for example, often have unique knowledge of the territory where the project is being developed, which can be critical to successfully completing a project in a timely and cost-effective manner. It may be appropriate that no veto power is afforded to either partner but rather a governance framework is implemented where the partners need to work collaboratively through issues and decision-making.

Carefully considering remedies for events of default to ensure continued alignment of respective interests and the value brought by both Indigenous and non-Indigenous parties to the partnership

  • Common default remedies such as equity dilution potentially undermine the relationship of the parties and create misalignment of interests if the project is no longer economically beneficial to affected Indigenous communities. Longer cure periods, flexibility for funding outstanding amounts on behalf of the Indigenous partner(s) to avoid payment defaults, and maintaining voting rights on matters that are important to the Indigenous communities even during events of default are all potential items to consider.

Responsibility for, and participation in, permitting and other regulatory procedures

  • Indigenous equity ownership can complement permitting and regulatory processes and the associated consultation with affected communities. Beyond ensuring that consultation obligations have been met, Indigenous and non-Indigenous parties should address expectations regarding ongoing consultation and reporting obligations in the partnering arrangement.
  • Partnering documentation can complement and augment the consultation process by providing specific provisions regarding environmental matters and the project. These can include: i) obligations to prepare environmental and social impact studies; ii) procedures that provide for the mutual exchange of information between the Indigenous partner(s) and industry proponents; and iii) obligations on the industry proponents to provide resources, if necessary, to Indigenous partner(s) and their communities to facilitate engagement.

The incorporation of traditional knowledge and laws and the recognition of cultural values

  • Consideration should be given as to how partnering structures can incorporate and reflect traditional knowledge and laws as well as cultural values in a manner that builds trust and contributes to meaningful engagement with Indigenous partner(s) and their communities.
  • When considering dispute resolution regimes, proponents should consider processes that involve elders, traditional land users and other community members.

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1 Other recent examples of projects involving Indigenous equity ownership include: a) the proposed equity investment by a coalition of First Nations groups in Alberta and Saskatchewan of up to $1 billion in TC Energy’s Keystone XL pipeline project announced on November 17, 2020; b) the proposed acquisition of Clearwater Seafood Incorporated by Premium Brands Holdings Corporation and a coalition of Mi’kmaq First Nations announced on November 9, 2020 in a transaction valued at $1 billion; c) the $93 million investment by a group of six Alberta First Nations in the Cascade Power Project announced earlier in 2020; d) the acquisition of a 40% interest in Alberta PowerLine by a consortium of Indigenous communities in 2019; and e) the acquisition of a 49% interest in Suncor Energy Inc’s $1 billion East Tank Farm Development by the Fort McKay and Mikisew Cree First Nations in 2017.

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