DMR compliance audit and the “once empowered, always empowered” rule

The DMR is currently embarking on a process whereby mining companies are being audited to determine compliance by those companies and the broader mining industry, with the transformation targets set by the Mining Charter. The Mining Charter requires that 26% of the mining industry be owned by historically disadvantaged South Africans by 1 May 2014. It is anticipated that the audit and the results of the audit, will be completed by December this year.

This raises a number of issues relevant for mining companies, namely –

  1. Should all companies have had a 26% ownership by HDSAs as at 1 May 2014, or will itsuffice for companies to have had such a 26% ownership by HDSAs at any time prior to 1 May 2014?
  2. What are the consequences for mining companies who did not have a 26% ownership by HDSAs as at 1 May 2014.

The first question is colloquially referred to as the “once empowered always empowered” rule. If such a rule can be read into the Mining Charter, a mining company would, as a general principle, not have had to have a 26% ownership by HDSAs as at 1 May 2014 to be in compliance with the Mining Charter if it had such ownership at some point prior to that date. The opposite is that in the absence of reading such a rule into the Mining Charter, all mining companies would have had to have had a 26% ownership by HDSAs as at 1 May 2014 and failing which, mining companies would be in breach of the Mining Charter and could, as a possible consequence, have their Prospecting Rights or Mining Rights withdrawn by the Minister after following the procedure in section 47 of the MPRD Act.

This principle is best explained by way of example. In 2010, mining company X does an empowerment transaction, whereby an HDSA acquires 26% of the issued shares of mining company X. One year later in 2011, that HDSA sells 20% of its shares with the result that as at 1 May 2014, mining company X is only owned to the extent of 6% by HDSAs. If a “once empowered always empowered rule” can be read into the Mining Charter, mining company X will not be in breach of the Mining Charter as at one point, mining company X was 26% owned by HDSAs. On the other hand, if no such rule can be read into the Mining Charter, mining company X would have had to have concluded a second transaction with HDSAs to “top up” its HDSA ownership component by 20% to have met the target of 26% by 1 May 2014.

To conclude that such a “once empowered always empowered” rule cannot be read into the Mining Charter, would lead to two absurd consequences. Mining companies would have to continuously do transactions with HDSAs to remain at a level of 26% ownership at all times. They would then also have had to have imposed uncommercial “lock-up” clauses in agreements with HDSAs, or impose other conditions such as those compelling HDSA shareholders to only be able to dispose of their shareholding in mining companies to other HDSAs. Why would an HDSA invest in any mining company if at the outset, he would not be able to sell his shares when market conditions are optimal? Furthermore, compelling HDSA shareholders to sell to other HDSA shareholders, immediately reduces the ability to sell shares at an optimum price to any buyer of any race.

It is a rule of the interpretation of statutes in South Africa, that any interpretation of a statute that leads to an absurd result, must be subordinated to an interpretation that does not. Accordingly, a “once empowered always empowered” rule must be read into the Mining Charter as to read the contrary, would lead to the absurd results referred to.

As a “once empowered always empowered” rule must be read into the Mining Charter to mitigate against absurdity, there can be no negative consequence for mining companies who are not at a
26% HDSA ownership threshold by 1 May 2014 if they have prior to that date, achieved that threshold and their HDSA shareholders have simply sold out for commercial reasons.

Should such a mining company apply for new Prospecting Rights or Mining Rights at a time when it is below the 26% threshold, that company would, in all probability, have to increase its shareholding to the minimum 26% HDSA ownership to be able to be granted such new Prospecting Rights or Mining Rights by the Minister.

Hulme Scholes
Director