Regulating indirect changes of control in south african mining companies

2022-12-20

Many jurisdictions prohibit the transfer of mining and prospecting rights from one company to another. This is restriction is usually accompanied by a prohibition placed on the company's shareholders, prohibiting them from transferring a controlling interest (shareholding) in the mining company. The second prohibition on a change in control exists to stop the circumvention of the first. Why worry about restrictions on selling the mining right, when you could just sell the mining company itself?

However, there is often uncertainty on if the prohibition on a change in controlling shareholders applies to both direct and indirect changes of control. This creates uncertainty when a mining company is not purchased directly, but is purchased at a company group level above the company directly holding a mining right.

Direct control is exercised by a company's direct shareholders. A change in direct control happens when the direct shareholders of a mining company sells their controlling stake in the mining company itself. Indirect control, however, is exercised by one of the mining company's other group companies, often its ultimate parent company. A change in control in this ultimate parent company could constitute an indirect change in control in the mining company, even though the shareholding in the mining company itself doesn't change.

In 2021, the South Africa High Court considered the regulation of indirect changes in control. It was held that the prohibition on changes in control in a mining company applies both to direct and indirect changes in control.

This means that commercial transactions concluded beyond South African boarders could be affected. Care must be taken when structuring a transaction leading to an indirect change in control of a South African mining company, and it will be important to consider if the South African Minister of Minerals and Energy must give consent before the parties give effect to the transaction.

Prohibition in the Mineral and Petroleum Resources Development Act

The South African Mineral and Petroleum Resources Development Act (MPRDA) restricts the transferability of mining rights, and the transferability of controlling interests in companies that hold mining rights. It provides that a mining right, or a controlling interest in a company holding a mining right, may not be transferred without the written consent of the Minister of Minerals and Energy (the Minister). Section 11(1) of the MPRDA states:

"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, sublet, assigned, alienated or otherwise disposed of without the written consent of the Minister, excepting the case of change of controlling interest in listed companies" (own emphasis).

The MPRDA doesn't define control, and doesn't explicitly state if the prohibition on changes in control applies to both direct and indirect changes in control.

Prohibition of indirect changes in control by the South African High Court

The application of section 11 of the MPRDA to indirect changes of control was considered in the case of Arqomanzi (Pty) Ltd v Vantage Gold Fields (Pty) Ltd, in a judgement delivered on 26 October 2021.

In this case, Barbrook Mines (Pty) Ltd (Barbrook) and Makonjwaan Imperial Mining Company (Pty) Ltd (Makonjwaan) held mining rights. Barbrook and Makonjwaan were owned by Vantage Goldfields (Pty) Ltd, which was in turn in turn owned by Vantage Goldfields SA (Pty) Ltd. Vantage Goldfields SA (Pty) Ltd was, in turn, owned by Vantage Goldfields Ltd, an Austrian registered company (Vantage Austria).

Vantage Austria was Barbrook and Makonjwaan's the ultimate parent company, but was three levels removed in the group structure.

Vantage Austria entered into a transaction where it issued shares to Macquarie Metals. After the issue of shares, Macquarie Metals held 98% of the issued share capital of Vantage Austria. Vantage argued that the issue of shares to Macquarie Metals was not prohibited by the MPRDA, and did not need the written consent of the Minister.

First, Vantage argued that the issue of shares by Vantage Austria is not a disposal because the shareholders of Vantage Austria had not sold or relinquished any shares. Vantage Austria had merely issued additional share capital to a new shareholder. Secondly, Vantage argued that the issue of shares by Vantage Austria did not result in any change in the shareholding of Barbrook or Makonjwaan, and there was accordingly no change in the controlling interest of these companies. In effect, Vantage argued that section 11 of the MPRDA only applied to direct, not indirect, changes of control.

The High Court disagreed with Vantage's submissions. The court looked at the ordinary meaning of a controlling interest in a company. It held that a controlling interest means an interest that enables a person to either directly or indirectly:

• exercise more than 50% of the voting rights of the company; or
• direct the affairs of the company through ownership, contract or otherwise.

The High Court considered the objectives that the prohibition on a change in control sought to achieve. These objectives included the recognition of the internationally accepted right of a state to exercise sovereignty over minerals and petroleum, and the scrutineering of foreign controlling entities to ensure the promotion of local and rural development and the upliftment of mining communities that are affected by mining operations. The court stated that the section 11 prohibition was a protective mechanism that could be easily watered down by a web of companies in a mining company's group structure.

The High Court noted that if the prohibition was intended to only apply to direct changes in control, then this could have been easily been expressly stated. It held that if control was interpreted restrictively to exclude indirect changes of control, then the objectives of the MPRDA couldn't be achieved. Excluding indirect changes in control would be inconstant with the objectives of the legislation, lead to circumvention and abuse, and defeat the entire purpose of the prohibition on changes of control. One must be careful and avoid [making] the Act not worth the paper it is written on.

The High Court accordingly held that section 11 of the MPRDA prohibits both direct and indirect changes in control in a company holding a mining right, unless the Minister consents in writing to the change in control.

Note: This case was confirmed on appeal by the Supreame Court of Appeal (SCA) [link to PDF]

Next steps

In this case the High Court confirmed that indirect changes in control of South African mining companies are prohibited without prior consent of the South African Minister of Minerals and Energy. This could affect commercial transactions concluded by external parent and group companies of a South African mining company.

When structuring a transaction that could lead to an indirect change in control of a South African mining company, and it must be considered if the South African Minister should be approached for consent before giving effect to the transaction.

One must consider where the effective control of the South African mining company lies by asking which company in the group exercises direct or indirect control. If the South African mining company's corporate structure of the places effective control in another group company, then that group company will fall under the prohibition in section 11 of the MPRDA. This will be the case even if the controlling company is registered outside South Africa.

Citations:

• Arqomanzi (Pty) Ltd v Vantage Gold Fields (Pty) Ltd (in Business Rescue) and Others (3772/2020) [link to PDF]
• Mineral and Petroleum Resources Development Act, No 28 of 2002 (MPRDA)