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The Mining Charter of 2018: Is the once empowered, always empowered principle applicable to BEE part

JDSUPRA / 28 FEBRUARY 2019 - 16.01 / STAFF REPORTER

The Mineral and Petroleum Resources Development Act, Act No. 28 of 2002 (the MPRDA) was promulgated with the aim of distributing mineral wealth more equally among citizens to remedy the injustices of apartheid. This was achieved by requiring that all existing mining rights be converted to "new order mining rights". Unconverted mining rights were lost, as were mining rights held but not actively mined as at the date of the MPRDA enactment, under a "use-it-or-lose-it" principle. Mining rights are essential to mining operations as they (i) permit the holder to conduct mining operations and extract the named mineral and (ii) give immediate title of the extracted mineral to the mining right holder.

As part of the conversion process, applicants – the existing "old order" mining right holders – needed to ensure that 25 per cent + 1 share in the right itself, or 25 per cent + 1 share in the equity of the company that held the right, became owned by historically disadvantaged South Africans (HDSAs). Most major mining companies achieved this target by combining credits for disposing assets outright to HDSA-owned companies and vendor-funded equity ownership by HDSA consortia in the company holding the mining right.

Companies that sold assets outright to HDSA investors and acquired HDSA shareholders in order to convert mining rights believed that this single transaction was sufficient empowerment for the duration of the life of the mining right. This became of great importance when empowered investors sold their investment to non-HDSA persons, and the equity of the company became un- or under-empowered. Companies relied on the doctrine of "once empowered, always empowered", and claimed no further empowerment transactions need be undertaken. New HDSA investors and certain elements in government demanded that HDSA investors continuously hold at least 26 per cent of the companies' equity necessitating "top-up" transactions should the empowerment partner exit. The legislature and the relevant government department failed to provide clarity on this issue.

Obviously this had a chilling effect on mine investment as existing equity holders were unsure whether their investments would be diluted, and whether costs would be incurred by the company in facilitating a new HDSA equity investor, as had often been the case in the past.

To aid companies to identify and measure compliance with empowerment targets, an instrument called the Mining Charter was issued in accordance with section 100 of the MPRDA by the relevant government department. Its status in law is much debated, but commentators have settled on classifying it as falling within a niche of administrative quasi-legislation. The court has declared it "a binding regulatory instrument and/or statutory instrument designed to ensure that the objects of the MPRDA and the Constitution are realised1". Mining Charter I was first issued in 2004 and updated in 2010 (Mining Charter II).

The original Mining Charter focused on the empowerment requirements that enabled conversion of mineral rights into "new order" rights, while the second iteration seemed to focus on progressing empowerment, addressing issues such as employment equity, community development, procurement and mine housing. On 27 September 2018, the Minister of Mineral Resources (the Minister) published the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry, 2018 (the Mining Charter, 2018, or Mining Charter III). On 19 December 2018 the Minister published Implementation Guidelines for the Mining Charter, 2018.

Mining Charter III further advances broad-based black economic empowerment (B-BBEE, or simply BEE) in every sector of the mining industry and settles much of the debate around "once empowered, always empowered".

This article focuses on the contentious once empowered, always empowered provision, which relates to mining right holders being able to retain empowerment status even if their empowerment partners have exited their equity investment, and discusses whether this provision is applicable to BEE shareholders higher up in a group structure exiting the group.

Once empowered, always empowered principle

Paragraph 2.1.1.1 of Mining Charter III provides that "[a]n existing mining right holder who has achieved a minimum of 26% BEE shareholding shall be recognised as compliant for the duration of the mining right". The once empowered, always empowered principle allows mining companies to claim recognition for previous BEE transactions, even if the BEE entities involved have since sold their interests or shares (bringing these mining companies below the 26 per cent BEE ownership threshold).

Paragraph 2.1.1.2 therefore goes on to state that "[a]n existing mining right holder who, at any stage [author's emphasis] during the existence of a mining right, achieved a minimum of 26% BEE shareholding, and whose BEE partner(s) exited prior to the commencement [author’s emphasis] of the Mining Charter, 2018, shall be recognised as compliant for the duration of a mining right and such recognition will not be applicable upon renewal". Mining rights typically have a 30-year tenure before requiring renewal.

Once empowered, always empowered is recognised in its pure form on the condition that the empowered shareholder exited prior to 27 September 2018.

Paragraph 2.1.6 deals with the disposal of BEE shareholdings after the commencement of Mining Charter III and states that, where a BEE shareholding or part thereof is disposed of below the prescribed minimum shareholding, a mining right holder's empowerment credentials shall be recognised for the duration of the mining right, provided that:

  • a mining right holder is compliant with the requirements of the Mining Charter, 2018 at the time of disposal – meaning it achieves a score of at least 50 per cent compliance in terms of the Mining Charter, 2018 scorecard;

  • the BEE shareholder has held the empowerment shares for a minimum period equivalent to a third of the duration of the mining right – usually 10 years, as a mining right is typically valid for 30 years;

  • an unencumbered net value has been realised by the exiting BEE shareholder;

  • the recognition of empowerment credentials shall only be applicable to measured effective ownership which has vested to BEE shareholding; and

  • an agreement detailing exit mechanisms and BEE shareholders' remaining financial obligations constituting a contract between the mining right holder and BEE shareholders is submitted to the Department (of Mineral Resources). The recognition of consequences of previous deals shall not be claimed against future mining rights or the renewal of existing mining rights and will lapse upon the transfer of a mining right or any part thereof.

Failure to comply with the provisions of paragraph 2.1.6 may result in previous empowerment transactions being deemed void, and the company requiring fresh empowerment investors, at the new 30 per cent empowerment equity thresholds and investor classes.

BEE partners exiting higher up the chain

There seems to be a gap in Mining Charter III with regards to BEE shareholders exiting the group structure higher "up the chain" of group companies. In other words, what happens when the mining right holder's (Company A) BEE shareholding is derived from a company (Company B) whose BEE ownership has been derived, in turn, from a holding company using the modified flow-through principle – and those BEE shareholders (of the holding company) dispose of their shares?

One may argue that the exit of the holding company's shareholders from the group (but not directly from Company A) would constitute an exit of Company A's BEE partners, as contemplated in paragraph 2.1.1.2 of Mining Charter III. Should the exit be prior to 27 September 2018, the once empowered, always empowered provision will still apply for the duration of the mining right. Should the exit be after Mining Charter III came into effect, it is debatable whether the procedure in paragraph 2.1.6 described above must be followed.

As the exit is not achieved directly and specifically by the BEE shareholders of Company B (but rather up the chain of holding companies), there may be no need to follow the requirements of paragraph 2.1.6. However, we can obtain some guidance from the definition of "effective ownership" in Mining Charter III.

Companies were often empowered using the so-called flow-through principle. The flow-through principle states that, if the rights of ownership of black people are held in a juristic person, then the rights of ownership of those black people in that juristic person are taken into account. To calculate the flow-through, the percentage of black shareholding is multiplied by the percentage of shareholding in the entity they have interest in. For example, if the holding company (HoldCo) is 25 per cent black owned and it owns 10 per cent of the subsidiary company (MineCo), then the subsidiary company is 2.5 per cent black owned (the effective black ownership).

If the effective black ownership in a holding company was greater than 51 per cent, the modified flow-through principle is applicable. The modified flow-through principle was introduced to provide companies and black shareholders of companies with some relief when it comes to the use of external non-BEE funding or the introduction of non-BEE partners into its chain of ownership. The modified flow-through principle provides that within this chain of ownership, if black people have a flow-through level of participation of at least 51 per cent, then (only once in the entire ownership structure of the measured entity) that participation may be treated as if it were 100 per cent black owned.

Modified flow-through used to calculate empowerment under historic empowerment transactions is likely to remain recognised.

Going forward, the vague definition per previous Mining Charters of "effective ownership" being defined as "the meaningful participation of HDSAs in the ownership, voting rights, economic interest and management control of mining entities" has been replaced in Mining Charter III as "the meaningful participation of Historically Disadvantaged Persons in:

(i) the unencumbered net value ownership;

(ii) voting rights attaching to an equity instrument owned by or held for a participant measured using the Flow-Through Principle or Control Principle;

(iii) economic interest representing a return on ownership of the entity similar in nature to a dividend right, measured using the Flow-Through Principle; and

(iv) management control of mining operations."

Modified flow-through will not be applicable as regards new mining rights, and the 4 per cent top-up provisions triggered by a change of ownership of a company or transfer of a mining right.

Conclusion

A transaction concluded before Mining Charter III was enacted in which the empowerment shareholder disposes of its "empowered" equity to a non-empowered investor, whether at the MineCo or HoldCo level, is protected by paragraph 2.1.1 of Mining Charter III and the once empowered, always empowered principle it articulates.

A transaction concluded after the enactment of Mining Charter III, in which an empowered shareholder exits its investment at a holding company level (and not by disposing of its empowered shares held directly in the mining company), should be conditional on the subsidiaries and other shareholders ensuring that the provisions of paragraph 2.1.6 are followed by all subsidiaries holding mining rights. Failure to follow the provisions of paragraph 2.1.6 may result in prior empowerment transactions not being recognised, a real risk to an unempowered shareholder purchasing empowerment equity.

Similarly, a transaction concluded after Mining Charter III was enacted in which a now under-empowered (or formerly empowered) HoldCo shareholder seeks to dispose of its direct investment in MineCo should also follow the provisions of paragraph 2.1.6 as a precautionary principle, for the reason that even an unempowered or under-empowered (although formerly fully empowered) shareholder who secured conversion of mining rights at the MineCo level will still be viewed as a deemed empowered shareholder, now exiting following Mining Charter III's enactment date.

While the High Court in Pretoria recently found in favour of the once empowered, always empowered principle in general, the distinction made between shareholders exiting prior to the enactment of Mining Charter III and those who exit after the enactment date of 27 September 2018, as well as what action precisely constitutes an exit by an HDSA equity holder, has yet to be tested before the courts.

Parties acquiring or disposing of an interest in a company holding a mining right, or seeking to acquire a mining right of their own, would be well advised to scrutinise the provisions of the empowerment transaction that gave rise to the mining right, be aware of its existing status, and obtain legal advice as to the consequences of the envisaged transaction. At its core, a mining right is the basis on which all mines generate income; its validity (and the potential of future empowerment transactions) must be clearly understood by all parties.

  1. Chamber of Mines of South Africa v. Minister of Mineral Resources and Another [2018] 2 All SA 391 (GP)

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LINK : https://www.jdsupra.com/legalnews/the-mining-charter-of-2018-is-the-once-61509/

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