The investment climate in Zimbabwe is confusing for investors, although this has not deterred resource-hungry Chinese and Indian companies from recently undertaking major acquisitions in the Zimbabwean energy and mining sectors, thereby filling the void created by the departure of many multinational companies from Zimbabwe in the last decade.

Current political situation

Following the contested results of the presidential elections in March 2008, members of Mr. Robert Mugabe's Zanu-PF party and Mr. Morgan Tsvangirai's Movement for Democratic Change (MDC), joined together in February 2009 to establish the power-sharing Government of National Unity of Zimbabwe (GNU). President Mugabe remained in place while Mr. Tsvangirai was appointed as Prime Minister. It is widely expected that new presidential and parliamentary elections will be held later this year, despite opposition from the MDC.

International sanctions

International sanctions were imposed on the Zimbabwean government by the European Union, the United States, Australia and Canada in 2002/2003. These sanctions mainly targeted individuals and companies linked with Mr. Mugabe and the Zanu-PF party. The sanctions for the most part consist of asset freezing, prohibitions on making payments to the individuals and companies referred to above and travel bans on the same individuals. The US sanctions restrict the use of multilateral financing or refinancing in Zimbabwe through institutions such as the International Monetary Fund (IMF), the African Development Bank or the Multilateral Investment Guarantee Agency. Although the GNU has been calling for these sanctions to be lifted, it is likely that they will largely remain in place until further improvements to the political situation have been made.

The indigenisation legislation

The Indigenisation and Economic Empowerment Act, 2007 (the "Act"), as implemented by the Indigenisation and Economic Empowerment (General) Regulations, 2010 (the "Regulations"), came into force on 1 March 2010.

As a preliminary comment, there are legal grounds for challenges to be made to the validity of both the Act and the Regulations.

The Act and the Regulations were enacted by Mr. Mugabe. It is likely that Mr. Tsvangirai did not have the opportunity to review or even see a draft of the Regulations before they came into force, which could in itself constitute sufficient means to challenge the Regulations, pursuant to the terms of the agreement establishing the GNU.

Furthermore, both the Act and the Regulations are drafted in such a way as to render their application if not impossible, at least highly impracticable at times (for example the definition of "indigenous Zimbabweans", which is discussed further below).

The GNU reportedly suspended the legislation in April 2010 (although the validity of this suspension was strongly disputed by Mr. Mugabe and the Zanu-PF members of the GNU).

Some changes to the Act and the Regulations are currently being discussed, in part to resolve some of the practical issues in actually applying the legislation in its current form.

Initially, the main reported amendment concerned the establishment of thirteen committees, each focusing on a specific economic sector, whose task was to determine the minimum indigenous Zimbabwean shareholding interest required for companies according to each economic sector (thereby allowing for an adjustment of the 51% threshold currently set out in Section 3(1) of the Act). However, the committees’ recommendations have never been publicly disclosed. It would appear that mining companies (together with banks) were targeted as "priority" targets of the government in its enforcement of the indigenisation legislation.

The current status of the indigenisation legislation is rendered all the more uncertain following the Zimbabwean government’s announcement at the end of last year that it intended to privatise several struggling state-owned companies, in contradiction with many provisions of the indigenisation legislation.

Main operative provisions of the Act and the Regulations

Section 3(1) of the Act is the key provision, as it sets out the "objectives and measures in pursuance of indigenisation and economic empowerment", i.e. as set out above, that the Zimbabwean government shall endeavour to secure that at least 51% of the shares of every public company and any other business (this is very widely defined in the Act to include most commercial companies and businesses) shall be owned by indigenous Zimbabweans. "Indigenous Zimbabweans" is broadly defined as persons who, before 18 April 1980, were disadvantaged by unfair discrimination on the grounds of their race, and any descendant of such persons. This definition is not clear and has been the subject of much debate but it is likely that it covers black Zimbabwean nationals (and possibly also Zimbabwean nationals of Indian or Chinese origin) to the exclusion of white Zimbabwean nationals.

Section 3(a) of the Regulations further specifies that within five years from 1 March 2010 or within five years from the commencement of the relevant business, every business in Zimbabwe with an asset value of or above US$500,000 must "cede" a controlling interest of not less than 51% of the shares or interests therein to "indigenous Zimbabweans".

Section 4(1) of the Regulations provides that, within 45 days of 1 March 2010 (i.e. before 14 April 2010) (or within 60 days of the date of commencement of the business for businesses not yet in existence at the time of the Regulations), every business in Zimbabwe with an asset value of or above US$500,000 must have submitted a Form IDG 01 to the Minister for Indigenisation and Empowerment (the "Minister"). The stated purpose of Form IDG 01 is "to enable the Minister to assess the extent of indigenisation in the sector of the economy to which the business belongs". The GNU extended the 14 April deadline at least once (until 15 May 2010) before it purportedly suspended the legislation in April 2010.

Under Sections 6, 7 and 8 of the Regulations, any restructuring, merger, demerger or disposal of a company covered by the legislation must be approved by the Minister, and such approval will not be given until the business complies with the indigenisation targets set out in an approved "indigenisation implementation plan". It is likely that any restructuring, merger, demerger or disposal taking place in Zimbabwe and involving a foreign entity will need to be negotiated with the Minister on a case by case basis.

It is not very clear from the Act and the Regulations to which degree, if any, businesses which have transferred shares to indigenous Zimbabweans pursuant to an "indigenisation implementation plan" will be compensated. Mr. Tsvangirai has maintained that there will be no "forced sales", and that all share transfers must be on a "willing buyer, willing seller" basis, and the Minister, Mr. Saviour Kasukuwere (Zanu-PF), initially stated that indigenous Zimbabweans would have to pay "market value" for their shares in businesses (although he has since then changed his position). It was reported that the GNU would accordingly amend the Regulations (by way of a statutory instrument) to substitute the term "cede" with "dispose", in order to alleviate concerns that businesses would be expropriated without adequate compensation, although this has now been jeopardised by the most recent developments, as discussed below.

Submission of implementation plans

Since the Regulations were passed, it would appear that several mining companies operating in Zimbabwe have submitted ad hoc indigenisation implementation plans to the governmental authorities. For example, the plan submitted by platinum-producer Zimplats reportedly provides for the transfer of a significant minority interest to indigenous Zimbabweans, the relinquishment of mineral rights to the State and other compensatory measures which, taken together, would have the effect of complying with the legislation, as Article 3(a) of the Regulations provides that a less than 51% share of indigenisation may be justified "in order to achieve other socially or economically desirable objectives" (which are not defined in the legislation). Such plans would be in line with the Zimbabwe Chamber of Mines’s stated desire to set indigenous Zimbabweans’ minimum shareholding in mining companies at 26% rather than 51%, moving the indigenisation measures closer to South Africa’s legislation.

New Regulation covering the mining sector

A new statutory instrument was published in the Zimbabwean Government Gazette on 25 March 2011 (the "Statutory Instrument"). The Statutory Instrument’s main provision is to compel mining companies with a net asset value of or above US$1.00 (rather than companies with an asset value of or above US$500,000 as set out in the Regulations) operating in the country to (i) submit indigenisation implementation plans to the Minister within 45 days of the Statutory Instrument’s gazettal, i.e. 9 May 2011 (although Mr Kasukuwere recently specified that the plans need to be submitted within 45 working days of the gazettal, i.e. 2 June 2011) and (ii) dispose of 51% of their shares to indigenous Zimbabweans by 25 September 2011.

It is likely that most local Zimbabweans will not have the financial means to acquire shares from foreign-owned companies. The Statutory Instrument has therefore sought to address this issue by firstly providing that shares in foreign-owned mining companies must be transferred to "designated entities", including state-owned entities such as the National Indigenisation and Economic Empowerment Fund and the Zimbabwe Mining Development Corporation (which is one of the companies subject to international sanctions as mentioned above), or alternatively to employee share ownership schemes. Furthermore, the Statutory Instrument provides that "the value of the shares or other interests required to be disposed of…shall be calculated on a basis of valuation to be agreed to between the Minister and the non-indigenous mining business concerned". The purpose of this provision is to preclude the need to transfer the shares in question at fair-market value, as the consideration to be paid by the indigenous Zimbabweans and/or designated entities is left to be decided by the Minister and the relevant mining company, with no objective criteria for determining such value set in the legislation.

The validity of the Statutory Instrument is likely to be challenged under public law (by way of a judicial review), as it is inconsistent with the underlying Act and Regulations (which legislation may itself be challenged under different grounds, as discussed above) and appears to go beyond the scope of what can usually be achieved through the means of delegated legislation (ultra vires).

Finally it should be noted that a Mining Bill, amending the Mines and Minerals Act 1961 and which provided for 25% local ownership of mining companies operating in Zimbabwe, was presented by the previous Zanu-PF government in 2006, and is still currently on hold. It is conceivable that the Bill will be enacted by the next Parliament, albeit not in its current form. It is far from clear at this stage whether the original threshold will remain at 25% or whether it will be amended following the latest developments in the implementation of the indigenisation legislation. Alternatively, depending on this year’s political developments, Zimbabwe could seek to draw inspiration from South African’s black economic empowerment legislation.

Herbert Smith is not qualified to advise on Zimbabwe law and this newsletter has therefore been prepared in cooperation with Wintertons, a Zimbabwe law firm.