Act No 28 of 2002 (Act) provides that 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 of Mineral Resources, except in the case of a controlling interest in listed companies.

As the Act does not define "controlling interest", the South Gauteng High Court has in the recent case of Mogale Alloys (Pty) Ltd v Nuco Chrome Bophuthatswana (Pty) Ltd and Others 2011 (6) SA 96 (GSJ), had the opportunity to interpret what the legislature meant by the disposal of a "controlling interest" in section 11(1) of the Act.

In this case, a written agreement was concluded between Mogale, Nuco and the late Edward Butler whereby Butler sold 33% of his shares (52%) in Nuco to Mogale. As a result of Butler's failure to transfer the 33% shares, Mogale then sought an order for specific performance of the agreement pertaining to the delivery of the shares purchased from Butler. One of Mogale's arguments was that the minster's consent as contemplated in section 11(1) was not required, as there was no transfer of a "controlling interest" from Butler to Mogale.

Mogale argued that the phrase "controlling interest" meant something other than a shareholding of more than 50%. Mogale stated that section 11(1) of the Act could imply a different permutation, depending on the circumstances, and the mere fact that Butler held 52% of the shares did not mean that he had a "controlling interest" in Nuco.

In support of its argument, Mogale contended that since Butler was not entitled to a majority of the votes and did not have the ability to appoint a majority of directors, he was not in control of Nuco. In response, Nuco and the executors of Butler submitted that clause 13 of the written agreement that dealt with the voting provisions had the effect of vesting control over Nuco in Mogale. It was further argued that section 11(1) of the Act was not directed at the acquirer of the interest (Mogale), and if that was so, the section would have said so expressly and rather that the section focuses on the disposer of the interest (Butler). As to the meaning of "controlling interest", Nuco and the executors argued that the term "controlling interest" refers to a majority shareholding in a company that owns a prospecting or mining right. They stated that at the date of the agreement, Butler owned 52% of the shares and by selling 33% to Mogale, Butler was no longer in control of Nuco and since the sale was going to have the effect of removing the controlling interest from Butler, the minister's written consent was required.

In deciding the case, the court stated that when issues call for an interpretation of a section of an act, it is trite that when interpreting words in a statute they must be interpreted within their context. The "context" refers not only to the language of the remainder of the statute but also to the scope, purpose and background of the statute.

The court stated that the fact that the shareholder, by virtue of his majority shareholding (more than 50%), was entitled to more than half of the company's assets or profits denoted the "control" envisaged there. As to "interest" and what constitutes a "controlling interest", the court held that one cannot be confined to a single characteristic or criteria. It could therefore mean that 50% of the issued share capital of the company or more than half of the voting rights in respect of the issued shares of the company could constitute a "controlling interest" and as a majority shareholder, the minister's consent would be required.

The judgment demonstrates that "controlling interest" and its disposal in a mining company is not limited to the powers of a shareholder. Even if a shareholder is not in control of half the voting rights in respect of the issued shares or the power to either directly or indirectly appoint or remove the majority of directors, this does not imply that such a shareholder does not have a "controlling interest". The list is not exhaustive and the right of a shareholder to more than half of the company's profit or assets constitutes a "controlling interest".

Butler was the holder of 52% of the shares of Nuco, which would constitute a "controlling interest" as held by the court.

Written by Rishaban Moodley, Director, Dispute Resolution practice, Cliffe Dekker Hofmeyr