Uncertainty In Mining Legislation Not Conducive To Future Overseas Investment

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Section 35 of the Diamonds Act 56 of 1986 and Section 11 of the Mineral & Petroleum Resources Development Act 28 of 2002 deal with similar scenarios which are becoming more and more prevalent and appropriate as the 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 our mining sector, to purchase shares in a company which is already vested with Prospecting or Mineral Rights than to try and start the process de nova by forming a new company, applying for the Prospecting or Mineral Rights and trying to set up the BEE component etc etc

Accordingly any attorney drawing a Sale of Shares and Loan Account Agreement which deals with the transfer of shares and cession of loan accounts in a South African company which is already vested with Mining or Prospecting Rights must, if the agreement will result in a change of control, take cognisance of Section 11 or Section 35 as the case may be.

Section 11 of the Mineral & Petroleum Resources Development Act 28 of 2002 provides as follows :

“Transferability and encumbrance of Prospecting Rights and Mining Rights.

  1. A Prospecting Right or Mining Right or an interest in any such Rights, 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 of the Diamonds Act 56 of 1986 reads as follows :

“Controlling interest in companies and close corporations

  1. no person shall without the prior written approval of the Regulator of Diamonds and Precious Metal Resources 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 the consent of the 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 very clear. It relates to the sale of shares which 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? It is submitted that on a simple reading of the Diamond Act, that the change of control in the holding company is not hit by this section. The section only deals with the sale of shares which results in a change of control in the company to which the licence has been issued.

Section 11 of the Mining Act however, is not so clear. The writer 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. In this case 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

(a)                 purchased and paid for the shares in the holding company                                     and;

(b)                  made a substantial contribution to the purchase and improvement of plant and machinery in the South Africa Mining Company and;

(c)                   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.   It was at this stage that the writer was consulted for the first time in this matter.

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 which had been transferred to the overseas purchaser.

Accordingly the shareholder of the mining company ie, 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 which 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 Section 11 referred to above. The shareholding in the South African mining company (which held the Mining Rights) never changed hands at all. It was the shares in the holding company which had changed hands.

With regard to Section 11 it is submitted, with respect, that this clause has been very poorly drafted.

On a close look at Section 11 the writer submits that the “company” and “close corporation” referred to can only mean the company or close corporation which holds the Mining Rights.   But it is not clear.

This was one of the occasions in the writer’s career when it was virtually impossible to give professional legal advice with any certainty. The advice given, was accordingly not legal, but rather advice based on the expediency of the situation, having regard to the massive investments which were 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 being dealt with in this section is becoming more and more applicable to the dynamics of the Mining Industry and the investment being made therein.

The practitioners and their clients 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 our Mineral Sector, which, in turn, could make a significant difference to the growth of this sector and of the economy generally.

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