Recent developments indicate a trend towards increased accountability on the part of companies with foreign operations. Mining companies with projects in foreign countries, and particularly those in emerging nations, should be aware of the potential for liability and heightened scrutiny relating to such projects.

Three recent related actions suggest that a Canadian company may be held responsible for its unlawful conduct in other jurisdictions. These actions (referred to as Choc v. Hudbay Minerals Inc.) were brought against Hudbay in Ontario by members of a native tribe in Guatemala who alleged that they were gang-raped, beaten and shot by security personnel employed by Hudbay’s Guatemalan subsidiary. The tribe members claimed Hudbay was directly liable for the actions of its subsidiary, a claim the Ontario Superior Court of Justice would not dismiss prior to trial. In reaching this decision the court considered Hudbay’s direct attempts to develop relationships with indigenous communities, as well as the argument that Hudbay’s subsidiary was acting as agent of Hudbay. While Choc has yet to proceed to trial, it should serve as a warning that a Canadian company could be found to owe a duty of care to those harmed by its foreign subsidiary.

On the legislative front, Canada is following the lead of the United States and the European Union by proposing to adopt laws requiring resource companies to disclose payments made to foreign governments in connection with overseas operations. These rules would capture a variety of payments, including taxes and royalties, above a to-be-specified threshold per mineral project. The Mining Association of Canada and the Prospectors and Developers Association of Canada have publicly supported this proposal. Other proposals, including the disclosure of payments made to Canadian and/or foreign aboriginal groups, are more contentious, and it remains to be seen how these will be implemented. At this stage, Canadian companies might prepare for the new laws by using more permissive confidentiality clauses and tracking payments made to foreign governments and aboriginal groups.

The need to actively monitor overseas operations is also highlighted in a peculiar American case, In re Puda Coal, Inc. Stockholders Litigation. Puda Coal, a public company incorporated in Delaware, had established a key Chinese subsidiary. Puda Coal’s audit committee eventually discovered that the chairman had transferred ownership of the subsidiary to himself, a situation which went unnoticed for a year and a half, and subsequently all of the company’s independent directors resigned. Shareholders sued Puda Coal, alleging breaches of fiduciary duty by its directors. The Delaware Court of Chancery refused to dismiss the lawsuit because, among other transgressions, the directors failed to fulfil their obligations to oversee management or to establish adequate systems for governing a public company.

Based on Puda Coal, it would be prudent for directors to take adequate steps to satisfy themselves of the legitimacy of foreign operations, which could involve, for example, site visits, discussions with local managers, and the engagement of local counsel. Additionally, audit committee members should carefully review with the company’s auditors any title opinions relating to the ownership of foreign projects, which opinions should be periodically updated.