Hogan Lovells Publications | 15 November 2017

Working the mining minefield: Black Economic Empowerment policy in the South Africa mining industry

Originally published on 15 June 2017, the third South African Mining Charter became the most contentious in South African history when it introduced onerous new regulations such as upping black shareholding from 26 percent to 30 percent within 12 months of the 2017 Charter coming into effect.

Shortly after the release, and after mining stocks lost approximately ZAR50bn in market value, the Chamber of Mines filed an urgent application to prevent the implementation of the Charter. They withdrew this application following an undertaking from the Minister of Mineral Resources not to implement the Charter pending the outcome of a review hearing to be held on 13 and 14 December 2017 in the North Gauteng High Court.

Unfortunately, the uncertain status of the revised Charter is not the only regulatory challenge faced by the mining industry in South Africa. There is also a policy "tug of war" in process between the Department of Mineral Resources (DMR) and the Department of Trade and Industry (DTI), with additional contradictions added by the South African Revenue Service, when it comes to black economic empowerment, in particular, the requirements relating to ownership of mining assets.

On the one hand there are those at the DTI which are of the opinion that the Codes of Good Practice published in terms of the Broad-Based Black Economic Empowerment Act, 2003 (BEE Act) should take precedence over the Mining Charter. The DMR on the other hand is of the opinion that the Mining Charter should apply to the mining sector. Section 100 of the Minerals and Petroleum Resources Development Act, 2002 (MPRDA) expressly grants the Minister of Mineral Resources the right to develop and implement an industry-specific code for the mining industry.

The revised Charter provides that the 30 percent black ownership of mining assets must comprise of the following:

• a minimum of 8 percent of the total issued share capital of the Holder (as defined in the MPRDA) shall be issued to black employee share ownership plans (ESOPs) or any similar employee structure schemes;
• a minimum of 8 percent of the total issued share capital of the Holder shall be issued to mine communities in the form of a community trust; and
• a minimum of 14 percent of the total issued share capital of the Holder shall be issued to black persons or black owned companies.

Whether or not the aforementioned ratios survive the revised Charter court review, it is likely that the final Charter will still require some portion of mining assets to be held by a combination of community trusts, ESOPs and black persons or black owned companies (known in DTI parlance as "black industrialists"). However, although the Codes and the Charter seem to be largely in agreement in encouraging black industrialist ownership, there are problematic policy contradictions facing community trusts and ESOPs.


Community Trusts

In relation to community trusts, the DMR's requirements are in sharp contrast to the current regulatory environment enforced by the DTI through its newly established BEE Commission. Recent experience with the BEE Commission has shown it is becoming increasingly difficult to recognise community trusts as legitimate BEE ownership vehicles.

This is borne out by the recent statement by DTI Minister Rob Davies where he claimed most community trusts registered with the BEE Commission do not satisfy requirements of the ownership scorecard, because they are dedicated to skills development and community projects but not ownership, which means black participants are treated as beneficiaries and not shareholders. In June 2017, the DTI announced the threshold for major B-BBEE transactions (including mining transactions) which must be submitted to the BEE Commission in terms of the BEE Act, being all BEE transactions with a value that equalled or exceeded ZAR25m, concluded after 24 October 2014.

The DTI and BEE Commission's suspicion of trusts arises from the prevalence of fronting—being the practice whereby companies claim the benefits of BEE points for transactions which do not really benefit participants as claimed. Since the BEE Commission became active last year it has taken a strong stance on stamping out fronting, which is now a criminal offence. The BEE Commission is particularly concerned with schemes that place restrictions on how beneficiaries should use the money they receive—which is a feature of many community trusts, which are drafted for specific purposes, such as community upliftment and education.

The BEE Commission's approach, which is purportedly to prevent the "abuse" of trusts as a fronting vehicle, is discouraging companies from taking this route, which seems to be in contradiction to the very approach the Charter seeks to implement as a mandatory requirement.

We further note that recent proposals made by the Davis Tax Committee to revise the tax treatment of trusts may also result in adverse changes to the tax treatment of trusts and beneficiaries.


ESOPs

The Charter also places an emphasis on ESOPs, on the basis that that employees should have an ownership stake in the mining company for which they work.

However, the tax treatment of ESOPs is not advantageous to employees. There are special tax provisions applicable where employees participate as beneficiaries in an employee share scheme. Should an employee acquire any rights in a trust which has been established for the purpose of holding shares in an employer company, then the employee will be obliged to account for their respective gains and losses once all restrictions in relation to the rights are removed. The relevant provisions are very widely phrased and effectively mean that should an employee obtain any benefits by virtue of their employment, they will have to account for income tax at their respective marginal tax rate, with the current maximum marginal tax rate being 45 percent.

The upshot of this means that that employee shareholders are under a more onerous tax burden than ordinary shareholders in respect of their shares, and such employee shareholders would, in most instances, be better off economically should they simply receive a cash bonus, rather than shares in their employer.


Conclusion

Overall, it is rather discouraging that the policy uncertainty in the mining industry is not just limited to the Charter. It is even more problematic that the apparent policy contradictions relate primarily to community trusts and ESOPs which are aimed at benefitting a larger number of beneficiaries, rather than just the chosen few "black industrialists".

Once there is more clarity on the status of the Charter's black ownership requirements, mining companies will still need to navigate the South African ownership "minefield" with caution, to ensure the best outcome for their stakeholders (including their community and their employees) from a DMR, BEE Codes, and tax perspective.

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