Min­ing com­pa­nies need to re­view struc­tures

The Star Early Edition - - NEWS -

THE Cham­ber of Mines’ re­jec­tion of a meet­ing re­quest by the De­part­ment of Min­eral Re­sources to at­tend the Min­ing In­dus­try Growth, De­vel­op­ment and Em­ploy­ment Task Team on 15 June 2017 shortly be­fore the re­lease of the Re­vised Min­ing Char­ter 2017 is a clear in­di­ca­tion that the Cham­ber of Mines and cer­tain of its mem­bers are plan­ning to chal­lenge the Char­ter on a num­ber of fronts.

The move ap­pears to be strate­gic, as any meet­ing with the De­part­ment of Min­eral Re­sources dur­ing the re­lease of a con­tro­ver­sial Re­vised Min­ing Char­ter could be viewed as a ‘tacit en­dorse­ment’ by the in­dus­try in re­spect of cer­tain of the pro­vi­sions.

The Min­ing Char­ter, called the Re­viewed Broad Based Black-Eco­nomic Em­pow­er­ment Char­ter for the South African Min­ing and Min­er­als In­dus­try, 2016, was pub­lished and be­came ef­fec­tive on 15 June 2017.

Min­ing com­pa­nies will surely an­tic­i­pate a strong le­gal chal­lenge to the Char­ter via the Cham­ber of Mines.

How­ever, in the opin­ion of Cliffe Dekker Hofmeyr di­rec­tors Gi­ada Masina, Al­lan Reid and Deepa Val­labh, they will also need to start con­sid­er­ing what it means for their le­gal and cor­po­rate struc­tures if such chal­lenges are un­suc­cess­ful.

This is par­tic­u­larly so given the short twelve month tran­si­tional pe­riod within which rights hold­ers must com­ply with the new re­quire­ments.

Mean­ing­ful trans­for­ma­tion re­mains an im­por­tant im­per­a­tive to ad­dress the in­equal­i­ties of the past, which the in­dus­try re­mains com­mit­ted to.

“The un­clear and am­bigu­ous man­ner in which the Char­ter has been drafted will pose sig­nif­i­cant chal­lenges to those seek­ing to com­ply,” says Masina.

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 dur­ing April 2016 con­tained strin­gent BEE struc­ture re­quire­ments, in­clud­ing that ev­ery min­ing right needed to be housed in a sep­a­rate spe­cial pur­pose ve­hi­cle, with each struc­ture be­ing em­pow­ered.

The new Char­ter is a slight im­prove­ment, as it seeks to ac­knowl­edge ex­ist­ing right hold­ers’ present cor­po­rate struc­tures.

“How­ever, a proper anal­y­sis of the pro­vi­sions re­gard­ing the own­er­ship el­e­ment leave the mind some­what reel­ing if one con­sid­ers the var­i­ous sce­nar­ios that could be rel­e­vant and the dif­fer­ent re­quire­ments that would be ap­pli­ca­ble thereto,” says Reid.

“It is clear that ap­pli­cants for new rights must com­ply with the new re­quire­ments.

“A new min­ing right holder must have a min­i­mum of 30 per­cent ‘Black Per­son’ share­hold­ing, al­lo­cated as fol­lows: a min­i­mum of 8 per­cent to black em­ployee share own­er­ship plans; a min­i­mum of 8 per­cent to mine com­mu­ni­ties, through a com­mu­nity trust; and a min­i­mum of 14 per­cent to ‘BEE En­trepreneurs’ (BEE Al­lo­ca­tion Thresh­olds).

A new prospect­ing right holder must have a min­i­mum of 50 per­cent plus one Black Per­son share­hold­ing,” adds Reid.

Val­labh ex­plains that 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 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.

“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.”

Jack­well Feris from CDH's Dis­pute Res­o­lu­tion Prac­tice and Reid cau­tion that the South African gov­ern­ment faces a real risk of be­ing chal­lenged in court and in the ex­treme case in in­ter­na­tional in­vest­ment tri­bunals for po­ten­tial breaches of the guarantees un­der ap­pli­ca­ble bi­lat­eral in­vest­ment treaties (BITs) and or mul­ti­lat­eral in­vest­ment treaties.

The Char­ter could, in re­spect of cer­tain pro­vi­sions, re­sult in BIT guarantees for qual­i­fy­ing for­eign in­vestors be­ing in­fringed.

“In par­tic­u­lar, the retroac­tive ap­pli­ca­tion of the Char­ter to ex­ist­ing min­ing right hold­ers, the in­crease of the BEE thresh­old from 26 to 30 per cent for ex­ist­ing rights hold­ers could prima fa­cie be a BIT vi­o­la­tion.

“The re­quire­ment to main­tain a 30 per cent BEE own­er­ship re­gard­less of the dis­posal of shares by BEE share­hold­ers dur­ing the ten­ure of the ex­ist­ing min­ing right – may also con­sti­tute a BIT vi­o­la­tion,” says Feris.

“The retroac­tive ap­pli­ca­tion of the Re­vised Min­ing Char­ter raises se­ri­ous le­gal con­cerns, as it ap­pears to vi­o­late the pre­sump­tion against the retroac­tive ap­pli­ca­tion of the law, par­tic­u­larly as rights have vested.”

The Char­ter con­tains an ex­press pro­vi­sion that ex­ist­ing rights hold­ers must en­sure com­pli­ance there­with, as op­posed to only mak­ing such re­quire­ment ap­pli­ca­ble to fu­ture rights hold­ers.

In or­der to give le­gal ef­fect to the obli­ga­tions be­ing im­posed by the Third Char­ter the Min­is­ter of Min­eral Re­sources will need to en­sure that the Min­eral and Petroleum Re­sources De­vel­op­ment Amend­ment Bill is passed as law to el­e­vate the Min­ing Char­ter 2017 to a le­gal obli­ga­tion for ex­ist­ing right hold­ers.

In do­ing so, any non-com­pli­ance with the Re­vised Min­ing Char­ter 2017 by ex­ist­ing rights hold­ers would be deemed a breach of the Min­eral and Petroleum Re­sources De­vel­op­ment Act, No 28 of 2002, as amended (MPRDA), sanc­tion­able by a sus­pen­sion or ter­mi­na­tion of such right in ac­cor­dance with s47 of the MPRDA.

The 30 per cent 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 Thresh­olds’ 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 per cent 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.

Cliffe Dekker Hofmeyr Di­rec­tor, Al­lan Reid

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