Mining companies need to review structures
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