Effects of Indigenisation notice 9 of 2016

via Effects of Indigenisation notice 9 of 2016 – The Zimbabwean. 1/4/2016 by N.M. Willsmer

The main question addressed in this opinion is this: to what extent does General Notice 9 of 2016 have the force of law? To the extent that it goes further than was permitted by its enabling section in the Indigenisation and Economic Empowerment (General) Regulations, it is ultra vires these Regulations and does not have the force of law.

In order to answer this question it is necessary first  to consider various provisions of the Indigenisation and Economic Empowerment Act and the Statutory Instrument and General Notices that followed it.

Section 3 (4) of the Act enables the Minister to prescribe by notice in a Statutory Instrument anything that may be prescribed under subsections (1) or (3) of section 3 of the Act; for example, endeavouring to secure that at least 51% of the shares of every public company and any other business (sic: see the criticism later in this memorandum of the use of the word “business” in this context, however) shall be owned by indigenous Zimbabweans.

Note that section 3 (1) of the Act spoke of 51% indigenisation only of the issued shares of companies and businesses, as opposed to the controlling interests in companies and businesses.  Controlling interests were referred to only in the narrow context of relinquishments thereof.

There is an important difference between a 51% shareholding in a company and a controlling interest in a company.  The latter is defined by section 2 of the Act as meaning only the majority of the voting rights of the shares in a company, which therefore allows the situation where the majority of the shares in a company may still be held by non-indigenous Zimbabweans (even though their voting rights are affected and they do not have control of the company).

Section 3 (4) of the Act deliberately avoided saying outright, perhaps because of the legislature’s wish to avoid the charge of unconstitutionality, that there must be 51% indigenisation or that the Minister can publish statutory instruments that require 51% indigenisation.  His regulatory powers in terms of section 3 (4) of the Act extend only to endeavouring to secure 51% indigenisation.  This gives the impression that his principal task is merely to persuade certain businesses to indigenise.

Section 21 (1) of the Act enables the Minister, after consultation with the Board, to make regulations that;

• provide for matters which the Act requires or permits to be prescribed (see section 3 (4) of the Act) or

(b)  are necessary or convenient, in his opinion, in order to carry          out or give effect to the Act.

Section 21 (1) of the Act also deliberately avoided saying outright, again perhaps because of the legislature’s wish to avoid the charge of unconstitutionality, that the Minister can publish regulations (note that General Notices do not qualify as regulations, however) that require 51% indigenisation.  As with section 3 (4) of the Act, his regulatory powers do not extend beyond the general objective of endeavouring to secure 51% indigenisation and perhaps he was enjoined only to try to persuade certain businesses to indigenise, not to compel them to do so.

Section 3 (5) of  the Act does say, however, that the Minister may prescribe an indigenisation share that is less than 51% in any business (sic) undergoing the restructuring or other developments envisaged in section 3 (1) of the Act, and that when prescribing a lesser share the Minister shall prescribe the general maximum time frame within which the 51% share or the controlling interest shall be attained.  Leaving aside the question of constitutionality, this is the only section of the Act which might be interpreted to require 51% indigenisation – and even then this would apply only in respect of businesses undergoing the restructuring or other developments envisaged in section 3 (1), not all businesses.

The failure of sections 3 (1) and 3 (4) of the Act to speak of a 51% indigenisation obligation was possibly remedied by section 3 (5) of the Act, but at best only to the limited extent stated above, therefore.

If the legislature had intended to require 51% indigenisation, it could easily have said so in the Act, in simple terms.  Its failure to do so indicates that this was not its intention.

Has the Minister actually yet prescribed, either by means of what is commonly understood to be a Statutory Instrument or by means of a General Notice in the Government Gazette (because a General Notice is also defined in the Interpretation Act as a Statutory Instrument), that 51% of the shares of public companies and businesses shall be owned by indigenous Zimbabweans?

Section 3 of the Regulations states that their general objective is to achieve 51% indigenisation within 5 years. Save for the possible exception of subsection (5), however, it does not actually require this (or any other) percentage level of indigenisation.  Nor does any other section of the Regulations:  see what is said below.

Section 4 of the Regulations requires every business (sic) with a net asset value of $500 000.00 to submit a form notifying the extent of its indigenisation and submitting its provisional  proposal for 51% indigenisation if this is not already in place.   It does not actually require 51% indigenisation.

Sections 5 (1), (2), (2a), (3), (5) and (6) of the Regulations allow for Ministerial approval or rejection of a provisional indigenisation implementation plan and ancillary matters.

Section 5 (4) of the Regulations enables the Minister to prescribe, by General  Notices in the Government Gazette, whatever indigenisation shares less than 51% are required in various sectors and subsectors of the economy.  It does not enable him to prescribe  51% indigenisation shares, as opposed to lesser shares, however.  It also enables him to prescribe by General Notices the maximum periods for which such lesser shares shall suffice and the weightings that can be assigned towards the fulfilment of the 51% indigenisation quota by reason of various socially and economically desirable objectives.

In then prescribing lesser shares for businesses other than those undergoing the restructuring or other developments envisaged in section 3 (1) of the Act (for example, in prescribing lesser shares for all manufacturing businesses) the Minister was probably acting ultra vires the Act.  Neither section 3 (5) nor section 21 of the Act clearly enabled him to extend his  powers in this manner.

Section 6 of the Regulations requires a business seeking a merger or restructuring to submit a provisional indigenisation proposal, which the Minister may then approve or reject, but it does not require 51% indigenisation.

Section 7 of the Regulations requires an unbundled or demerged business (sic) with a net asset value of $500 000.00 to submit a provisional indigenisation proposal, which the Minister may then approve or reject, but it does not require 51% indigenisation.

Section 8 of the Regulations requires a person relinquishing a controlling interest in a business (sic) with a net asset value of $500 000.00, where indigenous Zimbabweans do not already hold a controlling interest in the business (sic),  to submit a provisional indigenisation proposal, which the Minister may then approve or reject, but does it not require 51% indigenisation.

Section 9 of the Regulations requires an investor who seeks a licence from the Zimbabwe Investment Authority for an investment in cases where indigenous Zimbabweans will not hold a controlling interest to submit a provisional indigenisation proposal, and it states that the licence shall not be issued unless the indigenisation proposal is accepted.

Section 11 of the Regulations enables proof to be provided by the Minister of 51% indigenisation-compliance in the circumstances to which sections 6, 7, 8 and 9 apply.

Section 13 of the Regulations requires any business (sic) with a net asset value of $500 000.00 to submit a form in response to a notice published by the Minister with regard to indigenisation and empowerment assessment ratings.

Section 14 of the Regulations requires certain employee, management and community share ownership schemes and trusts to be taken into consideration when assessing the extent of indigenisation of a business (sic).  These schemes and trusts are not obligatory, however.

It will be seen from the above summary of relevant sections of the Regulations, therefore, that none of them save possibly for section 3 (5) actually requires 51% of the shares of companies and businesses to be owned by indigenous Zimbabweans.

Various sections do make it difficult, if not impossible, for certain transactions and investments to proceed without 51% indigenisation, but they do not require 51% indigenisation of the businesses (sic) in question if the transaction or investment is then abandoned.

The Regulations therefore basically reflect the Minister’s endeavours to secure indigenisation, rather than themselves impose an actual requirement of indigenisation.

As stated above, section 5 (4) of the Regulations enables the Minister to prescribe indigenisation shares that are less than 51%, and section 3 (5) of the Act says that when he does this he shall prescribe general maximum time frames for the attainment of 51% indigenisation.   This is the only basis upon which it might be argued that the Minister is enabled by the legislation (note: enabled by the Act, not by the Regulations) to require 51% indigenisation, and it should be borne in mind that this enablement might apply only when he publishes a valid General Notice in respect of whatever lesser shares he prescribes.

If the Minister felt that the Act enabled him to require 51% indigenisation and if he intended to require this, he could easily have said so in the Regulations, in simple terms.  His failure to do so indicates that this was not his intention.

Before General Notice 9 of 2016 is considered, it is necessary to consider various aspects of  the General Notices that preceded it in some detail, because General Notice 9 of 2016 refers to certain aspects of these earlier General Notices.

To date three General Notices have been published in the Government Gazette regarding various sectors of the economy – General Notices 114 of 2011, 459 of 2011 and 277 of 2012.  It is submitted that all three have no legal effect for various reasons (in addition to their being ultra vires the Constitution for other reasons, which are not covered in this opinion):

General Notice 114 of 2011, which purports to govern non–indigenously controlled, solvent mining businesses, was ultra vires the Act, invalid and outside the scope of the Regulations, because;

• It was not published by the Minister, so it did not have the force of law and did not qualify as a statutory instrument as defined in the Interpretation Act,
• the supposed enabling section 3 (4) of the Act, as read with section 3 (1) (a) of the Act, enabled the Minister to publish a statutory instrument which prescribed indigenisation only by indigenous Zimbabweans (i.e. individual persons), not the official designated agencies specified in the General  Notice; and

the supposed enabling section 5(4) of the Regulations did not in fact enable the publication of a General Notice which required the indigenisation of 51% shareholdings (as opposed to lesser shareholdings); or which prescribed the basis of calculation of shares or interests; or which required the submission of any indigenisation     implementation plan; or which set a new net asset value threshold for businesses required to submit indigenisation implementation plans.

Both General Notice 459 of 2011, which purports to govern the manufacturing sector, and General Notice 280 of 2012, which purports to govern nine other sectors, were invalid and outside the scope of the regulations, because:

• they were not published by the Minister, so they did not have

the force of law and did not qualify as statutory instruments as

defined in the  Interpretation Act, and

• the supposed enabling section 5 (4) of the Regulations did not in fact enable the  publication of a General  Notice prescribing the indigenisation of  51% shareholdings (as opposed to lesser

shareholdings).

The view that none of the three General Notices was published by the Minister is based on the fact that although the first paragraph of each General Notice gave an apparent notification that the Minister had published the General Notice, in the case of General  Notice 114 of 2011 it was the Minister’s Secretary (not the Minister) who actually published the General Notice; in the case of General Notice 459 of 2011 there was no indication of who had published the General Notice; and in the case of General  Notice 277 of 2012 it was the Minister’s Acting Secretary (not the Minister) who actually published the General Notice.

It is possible that the legal maxim embodied in the Latin principle omnia praesumuntur rite esse acta donec probetur in contrarium (“everything is presumed to have been done correctly unless the contrary is proved”) might apply to General

Notice 459 of 2011 but the other two General Notices themselves indicate that they were not published by the Minister.

None of the three General Notices goes further than a notification, as opposed to a declaration by the Minister, that the Minister thereby published their content.

With regard to the criticism that various provisions of the General Notices were not enabled by section 5 (4) of the Regulations, it is possible that a Court might decide that these provisions were nevertheless enabled by sections 3(4) or 21 of the Act and are therefore binding, even though neither section is quoted in any of the General Notices.

The question of the legal validity of the General Notices needs to be tested in Court.

The  judgment of the High Court in the matter of Transport Operators Association of Zimbabwe v The Minister of Transport, Communication and Infrastructural Development and the Ministry itself (HH 455-12) found that the Road Traffic (Construction and Equipment Use) Regulations, which are contained in Statutory Instrument 154 of 2010, were ultra vires and therefore invalid, for each of two reasons:

• the Regulations were not published by the Minister but by his Ministry, and
• the enabling section 81 (2) of the Road Traffic Act (Chapter 13: 11) did not enable the publication of the Regulations.

The first of these two reasons is of no real assistance in relation to the question of deciding whether the three indigenisation General Notices were published by the wrong person, because the preamble to the Road Traffic (Construction and Equipment Use) Regulations clearly states that they were published by the Ministry, not the Minister.

The second of these two reasons is of considerable assistance, however, because the Court reaffirmed the ultra vires doctrine in positive terms.

On a completely separate aspect of the indigenisation legislation, both the legislature and the Minister have confused the meaning of the word “business”, which is defined in section 2 of the Act as in effect meaning the owner or owners of what is normally understood to be a “business”.

The actual definition in the Act says that “business means any company, association, syndicate or partnership of persons that has for its object the acquisition of gain by the company, association, syndicate or partnership, or by the individual members thereof, whether the business is registered in terms of the Companies Act (Chapter 24: 03) or otherwise”.

Notwithstanding this, the Act and the Regulations sometimes speak of “businesses” in the different sense of the commercial undertakings that the owners own, as opposed to the owners themselves.

For example, “net asset value” is defined in terms which refer to the value of the assets less the liabilities of what can only be the undertaking owned by the owner or owners, not the assets less the liabilities of the owner or owners themselves.  If this were not the case, indigenisation might  have to be sought where a manufacturing undertaking with a net asset value of, say, only $10 000.00 is owned by a partnership of two persons whose combined net asset values total, say, $10 000 000.00, and this was clearly not intended by the legislation.

As section 3 (1) (a) of the Act stands, its objective of trying to achieve 51% indigenisation of any “business” – ie “any company, associate, syndicate or partnership of persons that has for its object the acquisition of gain by the company, association, syndicate or partnership, or by the individual members thereof” – simply does not make sense and might therefore be unenforceable, as might all the other sections of the Act and regulations which speak of indigenisation of the owners of undertakings, as opposed to indigenisation of the undertakings that they own.

Having considered the Act and the earlier General Notices, this opinion now directly addresses General Notice of 2016.

The title of General Notice 9 of 2016 – namely, “Frameworks, Procedures and Guidelines For Implementing The Indigenisation And Economic Empowerment Act”  ̶  indicates that its provisions are not mandatory, but the authorities may nevertheless  decide to submit that some of its provisions have the force of law and must be followed.

After one strips out those parts of the General Notice that purport to summarise the legislation to date and that relate to political statements, little of its content can be characterised as new and even less as having the force of law.

On the general topic of indigenisation, section 26 of the General Notice quotes section 3 (a) of the Regulations as if it requires 51% indigenisation within 5 years, but this is not what the section actually requires.  The General Notice fails to say that section 3 (a) of the Regulations provides merely that the Regulations as a whole were framed with the general objective that every business of or above the prescribed threshold must achieve 51% indigenisation within 5 years.

Section 15 of the General Notice refers to General Notice 114 of 2011, which relates to the Mining Sector, but, as stated above, the latter is ultra vires and therefore of no force or effect, at least in its requirement that indigenisation shares must be disposed of to any listed designated entity that does not qualify in terms of the Act as an “indigenous Zimbabwean,” namely, the National Indigenisation and Economic Empowerment Fund, the Zimbabwe Mining Development Corporation, a company or other entity formed by such Corporation, and any statutory sovereign wealth fund.

To these designated entities section 16 of General Notice  9 of 2016 adds the Zimbabwe Consolidated Diamond Company and any other company incorporated or controlled by Government, and it extends the supposed role of all these entities so that they are now apparent compulsory recipients of indigenisation shares not only  of businesses that are in the Mining Sector but also of all businesses exploiting natural resources.  These entities also do not lawfully qualify as “indigenous Zimbabweans,” however, so these provisions are ultra vires the enabling section and do not have the force of law.

In addition, the Minister is not enabled by any of the indigenisation legislation to deprive non-indigenous shareholders of their right to dispose of shares to indigenous persons of their own choice.

General Notice 9 of 2016 then turns to indigenisation in the Non-Resources Sectors, and sections 18 and 19 refer to General Notices 459 of 2011 (relating to the Manufacturing  Sector) and 280 of 2012 (relating to various other sectors). As stated above, these two General Notices are at least partly ultra vires and of no force or effect where they purport to require 51% indigenisation and to set new net asset value thresholds.

General Notice 9 of 2016 next turns to indigenisation in the Reserved Sectors and it refers to the various sectors reflected in the Third Schedule of the Regulations (which bizarrely include all retail and wholesale trade!).  The statement in sections 20 and 21 that these sectors are reserved for indigenous Zimbabweans is partly incorrect, because businesses that were operating in any such sector prior to the 1^st March 2010 are protected.

Its statement in section 23 that no new businesses will be allowed to invest in the Reserved Sectors unless approved as special cases is no doubt informative but is ultra vires the enabling section and does not have the force of law.

Its statement in section 25 that section 3 (5) of the Act allows indigenisation shares that are less than 51% to be prescribed by any Line Minister is incorrect.  It is the Minister of Youth Development, Indigenisation and Economic Empowerment who is empowered to prescribe lesser shares, not any Line Minister to whom an application for assessment is referred in terms of section 4 of the Act.

The Empowerment Credits referred to in section 30 and reflected in Table 2, providing for credits instead of shares to make up the 51% indigenisation quotas required in certain sectors, are intra vires the enabling section and do have the force of law.

General Notice 9 of 2016’s provisions, for example in section 37, regarding the Indigenisation Compliance and Empowerment Levy  are ultra vires section 17 of the Act, which is the enabling section, and they do not have the force of law. Levies may only be imposed with the approval of the Minister of Finance and in Statutory Instruments that have first been approved by Parliament and are then published in terms of section 17 of the Act.

On the 18^th February 2016 the National Indigenisation and Economic Empowerment Board published a press statement which said that:

General Notice 9 of 2016 directed that all businesses must fully comply with the indigenisation legislation by the 31^st March 2016.

• Because of this, any person (sic) or business operating in Zimbabwe must have the following two documents by the 31^st March 2016;
• a letter of approval from the Zimbabwe Investment Authority or the Minister, and
• (ii) a compliance certificate from the Board.

Both statements were largely incorrect, for the following reasons:

Whilst the general proposition that all businesses must fully comply with the indigenisation legislation is (obviously) correct, all the General Notice says is that all companies (not all businesses as defined) that wish to invest in Zimbabwe must submit their Indigenisation Implementation Plans by the 31^st March 2016. The General Notice did not require such submissions to be made by such deadline by all businesses operating in Zimbabwe, let alone by all persons operating in Zimbabwe.

(b)     Whilst letters of approval and compliance certificates are required by the Regulations in respect of certain businesses in certain circumstances, the           General Notice does not contain any such     requirement, let alone does it apply any such requirement to all          persons or businesses or set any           such deadline.

Letters of approval and/or compliance certificates are required by the Regulations only of the following persons and businesses:

(a)     Those investors who propose an investment for which an investment           licence is required in terms of the Zimbabwe Investment Authority Act and where a controlling interest is not reserved for indigenous Zimbabweans: Section 9 (3) of the Regulations applies. Note that the         Zimbabwe Investment Authority Act does not yet require such investment licences, however.

• Those investors who acquire a controlling interest in a Reserved Sector business after the 25^th March 2011 and wish to avoid prosecution in terms of section 9 (4) of the Regulations.
• Those businesses that commenced operating in the Reserved Sector on or after the 1^st March 2010, irrespective of the extent to which they are indigenously-owned:  section 9A (1) of the Regulations applies.            Note that businesses that were already operating in the Reserved       Sector by the 1^st March 2010 are not required to apply for letters of approval or compliance certificates.

On the 28^th June 2015 the Sunday Mail reported that the Board was conducting a levy blitz in terms of which it was seeking fees from all businesses operating in the Reserved Sector.

If this was in fact the case, the Board was not entitled to act in that manner. Not only does the indigenisation legislation not ring-fence all Reserved Sector businesses for indigenous Zimbabweans,  a business owned by a non-indigenous Zimbabwean which commenced operating before the 1^st March 2016 is not obliged  to apply for any certificate or pay any fee.

Any future such blitz, following either General Notice 9 of 2016 or the above press statement, that is conducted in respect of either pre-1^st March 2010 businesses in the Reserved Sector or businesses generally, should be viewed in the light of the above criticism.