Relying on High Court’s empowerment guidance may be folly

WHEN the Mineral and Petroleum Resource Deveopment Act (MPRDA) came into force in 2002, existing mining companies were compelled to sell 26% equity to South African black or empowered investors. Unempowered mining companies would lose their mining rights – the legal basis on which companies conduct mining activities and acquire ownership of the mined ore.

From the outset, no one was certain whether this 26% empowerment shareholding was a once-off requirement, or if a company would always need a 26% empowerment shareholder in order for its mining rights to remain valid – a so-called continuing empowerment obligation.

‘Once empowered, always empowered’ (OEAE) reflected the school of thought that a single empowerment transaction was a once-off obligation, and on the commercial exit of empowerment partners, a company’s shareholders had no obligation to replenish its shareholding with new empowerment shareholders.

The government did nothing to clarify this confusion. Despite several amendments to the MPRDA and the promulgation of at least two mining charters, the relevant ministries remained resolutely silent on this critical aspect of the law.

To safeguard themselves against an ongoing empowerment obligation, existing shareholders relied on a variety of contractual provisions. Typically empowerment shareholders were locked-in; prevented from selling their shares for a period of time, usually for ten years. Other mechanisms included ‘like-for-like’ clauses –  share disposals by empowerement shareholders only permissable if made to other empowered entities. Empowerment shareholders were also contractually obliged to remain empowered – usually defined as having 50.1% black equity ownership.

After the shock at the extent of the change wrought by MPRDA had passed, significant mining companies started to take transformation and black involvement in the mining industry seriously. A reluctance to maintain an empowerment shareholding did not arise from innate hostility to empowerment, but borne by the bruising experiences and huge time vacuum that arose in dealing with the regulator, the then Department of Minerals and Energy (DME). A great deal of time was also spent assuring the companies shareholders and managing disputes in empowerment consortia. The DME was inefficient and suspicious, and mining companies did themselves few favours in giving their lawyers free hand to draft voluminous baroque agreements, giving rise to the DME’s (on occasion) reasonable suspicion that miners were grudging in their compliance.

Since then, several forward-looking, notably foreign-held mining companies have come to realise the value and credibility black co-investors bring to their South African operations.

Utilising lock-ins, established mining companies had kicked for touch. When the standard ten year lock-ins began to expire between  2014 – 2016, the issue remained unresolved.

The time was ripe when the Chamber of Mines, today the Minerals Council, approached the High Court for a declaratory order – a finding in which the law is articulated, as opposed to a judgement given in a disputed matter.

In 2018, the High Court ruled that, subject to certain conditions set out in the mining rights themselves, the empowerment transactions entered into by companies to retain their mining rights were sufficient to meet their empowerment obligations, then and into the future. Should an empowerment shareholder choose to sell its equity in the company, and the company, or the majority shareholder, fail to secure a new empowerment shareholder, the company was not in breach of its empowerment obligations, and its mining rights were safe. The principal of OEAE was upheld.

There are difficulties in relying too heavily on this judgement; the mining legislation can easily be amended to by-pass this ruling, the minority dissenting judgement is legally sound, more rigorous and far more in keeping with contemporary constitutional thought – interpreting the MPRDA in terms of its self-proclaimed purposive intent.

Finally, the government has appealed the ruling. The court was placed in the unenviable position of having to spin gold from straw – providing legal certainty where only legislation could, and should, do so.

Brandon Irsigler is MD of Strata Legal

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