Certainty in mining legislation needed

April 1st, 2012

By Michael Karp

Section 35 of the Diamonds Act 56 of 1986 and s 11 of the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) deal with similar scenarios that are becoming more prevalent as foreign conglomerates move to South Africa in search of companies with prospecting or mineral rights.

In simple terms, it is much easier for a foreign investor interested in investing in the South African mining sector to purchase shares in a company already vested with prospecting or mineral rights than to start the process de novo by forming a new company, applying for the prospecting or mineral rights, trying to set up the black economic empowerment (BEE) component, etcetera.

Accordingly, any attorney drawing up a sale of shares and loan account agreement dealing with the transfer of shares and cession of loan accounts in a South African company already vested with mining or prospecting rights must, if the agreement will result in a change of control, take cognisance of s 11 or s 35, as the case may be.

Section 11(1) of the MPRDA provides as follows:

‘Transferability and encumbrance of prospecting rights and mining rights

11(1) A prospecting right or mining right or an interest in any such right, or a controlling interest in a company or close corporation, may not be ceded, transferred, let, sub-let, assigned, alienated or otherwise disposed of without the written consent of the Minister [of Mineral Resources] except in the case of change of controlling interest in listed companies.’

Section 35(2) of the Diamonds Act reads as follows:

‘35 Controlling interest in companies and close corporations

(1) No person shall without the prior written approval of the South African Diamond and Precious Metals Regulator acquire a controlling interest in any company or close corporation after a licence has been issued or transferred in terms of this chapter to that company or close corporation.’

Accordingly, if the sale of shares results in a change of control in the company, the consent of the Minister or regulator, as the case may be, must be obtained, failing which the sale of shares is void or at least voidable.

Section 35 of the Diamond Act is clear. It relates to a sale of shares that results in the change of control in the company to which a licence has been issued.

What about the change of control of the shares in the holding company, which in turn is holding 100% of the shares in the company to which the licence has been issued? I submit that, on a simple reading of the Diamond Act, the change of control in the holding company is not hit by this section. The section only deals with a sale of shares that results in a change of control in the company to which the licence has been issued.

Section 11 of the MPRDA, however, is not so clear. I was recently consulted by an overseas conglomerate which had gained control of a South African mining company by the purchase of shares in the holding company. The mining company had already been awarded a contract from a third party South African to deliver what amounted to many hundreds of containers of a certain commodity over a lengthy period of time.

The overseas conglomerate had already –

  • purchased and paid for the shares in the holding company;
  • made a substantial contribution to the purchase and improvement of plant and machinery in the South Africa mining company; and
  • had already exported and partially performed under its contract to supply the commodity to the third party referred to above

when the validity of the agreement dealing with the sale and purchase of shares and loan account in the holding company came into question.

As explained above, in this particular matter all the shares in the company holding the mining rights were held by a holding company and it was the shares in the holding company that had been transferred to the overseas purchaser.

Accordingly, the shareholder of the mining company, that is, the holding company, which held all the rights in the mining company, remained as the controlling shareholder in the mining company. It was only the controlling interest in the holding company that had been sold and therefore the question had to be considered as to whether or not the sale agreement for the change of control in the holding company was tainted in any way by the provisions of s 11 referred to above. The shareholding in the South African mining company (which held the mining rights) did not change hands at all. It was the shares in the holding company that had changed hands.

With regard to s 11, I submit that this clause has been very poorly drafted.

On a close look at s 11, I submit that the ‘company’ and ‘close corporation’ referred to can only mean the company or close corporation that holds the mining rights, but it is not clear.

It was virtually impossible to give professional legal advice with any certainty. The advice given was accordingly not legal, but rather based on the expediency of the situation, having regard to the massive investments made and the value of the contract in the hands of the client. The reader can use his own imagination as to the nature of the advice given.

The legislature should review this part of the legislation urgently as the scenario dealt with in this section is becoming more and more applicable to the dynamics of the mining industry and the investment being made therein.

However, practitioners need certainty in order to advise their clients, especially in this field of endeavour where overseas investors are ready to invest large amounts of funding in South Africa’s mineral sector, which in turn could make a significant difference to the growth of this sector and the economy generally.

Of course it is possible that in the meantime (ie, before the legislature deals conclusively with his matter) the courts could interpret s 11 of the MPRDA so as to prohibit the transfer of a controlling interest in a holding company without the Minister’s consent.

Michael Karp BA LLB (Wits) is an attorney in Johannesburg.

This article was first published in De Rebus in 2012 (April) DR 56.