Un­wieldy char­ter un­likely to re­sult in true em­pow­er­ment

The Star Early Edition - - OPINION & ANALYSIS - Gi­ada Masina, Al­lan Reid and Deepa Val­labh

THE RE­VIEWED Broad-based Black Eco­nomic Em­pow­er­ment Char­ter for the South African Min­ing and Min­er­als In­dus­try was pub­lished and be­came ef­fec­tive on June 15. Al­though min­ing com­pa­nies will surely wait for the out­come of the le­gal chal­lenges to the char­ter by the Cham­ber of Mines, they need to start con­sid­er­ing what the char­ter will mean for their cor­po­rate struc­tures if the chal­lenges are un­suc­cess­ful.

Mean­ing­ful trans­for­ma­tion re­mains an im­por­tant im­per­a­tive, and the in­dus­try re­mains com­mit­ted to it. How­ever, the am­bigu­ous man­ner in which the char­ter has been drafted will pose sig­nif­i­cant chal­lenges to those seek­ing to com­ply.

Most min­ing com­pa­nies have spe­cific cor­po­rate struc­tures in place to cater for the pre­vi­ous 2010 char­ter’s black eco­nomic em­pow­er­ment (BEE) re­quire­ments.

The re­viewed char­ter pub­lished for com­ment in April last year con­tained strin­gent BEE struc­ture re­quire­ments, in­clud­ing that ev­ery min­ing right needed to be housed in a sep­a­rate spe­cial pur­pose ve­hi­cle, with each such struc­ture be­ing em­pow­ered.

The new char­ter is a slight im­prove­ment, be­cause it seeks to ac­knowl­edge ex­ist­ing right hold­ers’ present cor­po­rate struc­tures. How­ever, a proper anal­y­sis of the pro­vi­sions re­gard­ing own­er­ship leave the mind reel­ing if one con­sid­ers the var­i­ous sce­nar­ios that could be rel­e­vant and the dif­fer­ent re­quire­ments that would be ap­pli­ca­ble thereto.

It is clear that ap­pli­cants for new rights must com­ply with the new re­quire­ments. A new min­ing right holder must have a min­i­mum “black per­son” share­hold­ing of 30 per­cent, al­lo­cated as fol­lows: (i) a min­i­mum of 8 per­cent to black em­ployee share own­er­ship plans; (ii) a min­i­mum of 8 per­cent to mine com­mu­ni­ties, through a com­mu­nity trust; and (iii) a min­i­mum of 14 per­cent to “BEE en­trepreneurs” (BEE al­lo­ca­tion thresh­olds). A new prospect­ing right holder must have a min­i­mum black per­son share­hold­ing of 50 per­cent plus one.

Con­tro­ver­sially, the char­ter pro­vides that a new min­ing right holder must, sub­ject only to the Com­pa­nies Act’s sol­vency and liq­uid­ity re­quire­ments, pay a min­i­mum of 1 per­cent of its an­nual turnover in any given year to its black per­son share­hold­ers, prior to and over and above any share­holder dis­tri­bu­tions. This cre­ates a guar­an­teed div­i­dend struc­ture that pre­vi­ously was not a hard re­quire­ment.

Pay­ment pro­vi­sions

In an am­bigu­ous and un­clear pro­vi­sion, the char­ter also seems to seek to reg­u­late how pay­ment for the black per­son share­hold­ing will take place, with, ul­ti­mately, the holder or ven­dor writ­ing off any un­paid bal­ances at cer­tain mile­stones.

Given the con­straints of the cur­rent eco­nomic cli­mate, these two re­quire­ments will fur­ther re­strict the cash re­sources of min­ing com­pa­nies seek­ing to re­main vi­able and limit the ex­ten­sive job losses his­tor­i­cally suf­fered by the in­dus­try.

The 30-per­cent stake must be held in a spe­cial pur­pose ve­hi­cle sep­a­rate from the right holder. Should any black per­son hold shares within one of the BEE al­lo­ca­tion thresh­old cat­e­gories, such black per­son must en­sure, when trans­fer­ring any shares, that the trans­feree falls within the same cat­e­gory.

Sub­ject to such re­quire­ment, the char­ter also re­stricts the ex­tent that BEE en­trepreneurs can di­lute their share­hold­ing. If ad­hered to, this pro­vi­sion will at least elim­i­nate the “once em­pow­ered, al­ways em­pow­ered” de­bate re­gard­ing new rights. How­ever, it will ren­der the shares held by such spe­cial pur­pose ve­hi­cles al­most worth­less, achiev­ing neg­li­gi­ble em­pow­er­ment at enor­mous costs to the holder and its re­main­ing share­hold­ers.

Ad­di­tion­ally, the pro­vi­sion giv­ing the 30-per­cent black per­son share­hold­ers the right to trans­port, trade and mar­ket their pro­por­tion­ate share of pro­duc­tion will cause nu­mer­ous min­ing com­pa­nies to breach ex­ist­ing sales and off­take ar­range­ments. The char­ter aims to recog­nise the his­tor­i­cal BEE trans­ac­tions of ex­ist­ing min­ing and prospect­ing rights hold­ers as fol­lows:

Ex­ist­ing hold­ers, whether cur­rently at or be­low a black per­son share­hold­ing of 26 per­cent, must top up their black per­son share­hold­ing to 30 per­cent within 12 months. They do not need to ad­here to the BEE al­lo­ca­tion thresh­olds, and the top-up shares must be given pro­por­tion­ally to the ex­ist­ing BEE part­ners, un­less the BEE part­ners have al­ready ex­ited the struc­ture, in which case the top-up shares should be held by a BEE en­tre­pre­neur. This re­quire­ment lim­its al­low­ing new BEE en­trants into the struc­ture and does not there­fore nec­es­sar­ily cater for what the char­ter seeks to achieve: more broad-based BEE struc­tures.

Ex­ist­ing hold­ers who have main­tained a black per­son share­hold­ing of more than 30 per­cent may main­tain their ex­ist­ing struc­tures un­til the BEE part­ners exit the struc­ture or upon the right’s re­newal.

His­tor­i­cal trans­ac­tions

The char­ter states that the recog­ni­tion of his­tor­i­cal BEE trans­ac­tions shall not ap­ply to ap­pli­ca­tions for new rights, the re­newal thereof or to “ap­pli­ca­tions in terms of sec­tion 11 of the Min­eral and Petroleum Re­sources De­vel­op­ment Act af­fected by such recog­ni­tion”. It there­fore ap­pears that, upon re­newal of any ex­ist­ing rights, recog­ni­tion of his­tor­i­cal BEE trans­ac­tions would no longer ap­ply. Al­though un­clear, this also ap­pears to be the case where ap­proval for a trans­ac­tion in­volv­ing a right trans­fer or the change of con­trol of the holder is re­quired.

If his­tor­i­cal BEE trans­ac­tions are not to be recog­nised in such cir­cum­stances, pre­sum­ably the new ap­pli­ca­tion re­quire­ments would be rel­e­vant. How­ever, this is not stated specif­i­cally. This could re­sult in a sce­nario where an ex­ist­ing right holder com­plies with the tran­si­tional re­quire­ments by June 14, 2018 and again has to com­ply when the right is re­newed or if sec­tion 11 ap­proval is re­quired – but with en­tirely dif­fer­ent re­quire­ments. This is oner­ous and im­prac­ti­cal.

There­fore, al­though the in­ten­tion may have been to recog­nise his­tor­i­cal BEE trans­ac­tions and ex­ist­ing cor­po­rate struc­tures to some ex­tent, the var­i­ous re­quire­ments ap­pli­ca­ble in dif­fer­ent cir­cum­stances will likely re­sult in min­ing com­pa­nies hav­ing to cater for var­i­ous al­ter­na­tive sce­nar­ios, through im­ple­ment­ing sep­a­rate and com­plex struc­tures. In an in­dus­try that re­quires true trans­for­ma­tion, one won­ders how pro­duc­tive this will be and whether the costs as­so­ci­ated with such re­struc­tures will reap the ben­e­fits in­tended to flow to a larger group of BEE ben­e­fi­cia­ries. Gi­ada Masina, Al­lan Reid, Deepa Val­labh of Cliffe Dekker Hofmeyr

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