Foskor accused of ‘fronting’ in worker share deal

The B-BBEE Commission has accused state-controlled phosphate miner Foskor of fronting, finding that the company established a sham employee ownership scheme that it used to bolster its BEE credentials and obtain regulatory advantages, including a mining right.

In a devastating finding, the commission concluded that the Kopano Foskor Employee Share Ownership Plan (Esop) was structured to circumvent the Broad-Based Black Economic Empowerment (B-BBEE) Act, enabling Foskor to claim black ownership credentials it was not entitled to and access mining licences while employees were relegated to passive spectators in a scheme ostensibly created for their benefit.

The findings raise questions about whether Foskor obtained mining rights and other regulatory benefits using ownership credentials that the commission says should never have qualified it for B-BBEE recognition.

In 2010, Foskor, in which the Industrial Development Corporation (IDC) owns a 59% controlling stake, created the Kopano Foskor Employees Trust to acquire shares on behalf of 1,800 employees. The IDC provided funding of R147m for the acquisition of a 6% stake in Foskor for employees. When the share scheme was set up, Esop’s 6% stake at Foskor was worth R210m, while the company itself was valued at R3.5bn.

The agreement promised employees a clear benefit: when the shares matured in March 2018, they would either become direct shareholders in Foskor following a JSE listing or receive a cash payment equal to the value of their shares if the listing did not occur. But while Foskor failed to list, the company also failed to honour the alternative commitment, leaving workers without either shares or compensation.

In 2019 employees represented by advocate Thembinkosi Edwin Gumbi took the matter to the commission, alleging that the trust was little more than a box-ticking exercise designed to manufacture black-ownership credentials.

Media reports quoted Gumbi as having told the commission through an affidavit that ‘the main reason for the scheme was to ensure compliance with broad-based BEE policies as well as the mining charter’

They claimed Foskor never intended to genuinely empower workers and instead used the scheme to comply with empowerment regulations while withholding meaningful ownership and benefits from employees.

Media reports quoted Gumbi as having told the commission through an affidavit that “the main reason for the scheme was to ensure compliance with broad-based BEE policies as well as the mining charter”.

The commission notified Gumbi of its findings in a letter dated April 29. It said the terms of the Kopano Foskor Employees Trust seem to have been established to circumvent the provisions of the codes of good practice and the B-BBEE Act, adding that the scheme fell short of meeting the Esop requirements.

“Kopano [Foskor] Employees Trust was created to facilitate black ownership that enhanced the B-BBEE status of Foskor, including providing it with accessing to a mining licence, but the black people whose credentials were claimed by the entity did not have any participation in the election of trustees to represent their interests and for all intents and purposes, the entity was in control of all decisions relating to the said trust, which ought to be an independent shareholder, which points to misrepresentation of B-BBEE status and fronting practice which are criminal offences.”

Commission executive manager for investigations and enforcement Moipone Kgaboesele, who wrote the letter to Gumbi, said the commission had presented Foskor with its damning findings but the company had elected not to respond. The decision had left Foskor exposed to some of the harshest sanctions available under empowerment legislation.

These include pressing criminal charges for the alleged misrepresentation of Foskor’s B-BBEE status and a recommendation that the National Treasury place both the company and its directors on a restricted suppliers list, effectively shutting them out of state business for up to 10 years.

Perhaps most significantly, Kgaboesele said the commission could ask the courts to invalidate contracts awarded to or concluded by Foskor on the strength of B-BBEE credentials that the commission found were improperly obtained.

Having considered the additional information, the commission advised Foskor that, while its final findings remain unless set aside by a competent court, it had resolved not to implement the recommendations contained in the report—  Company statement

In a written response, Foskor said it took its transformation, regulatory and governance obligations seriously and had engaged with the B-BBEE Commission constructively throughout this matter.

After receiving the commission’s findings, the company said it made further representations and submitted additional supporting information to provide further context and clarity.

“Having considered the additional information, the commission advised Foskor that, while its final findings remain unless set aside by a competent court, it had resolved not to implement the recommendations contained in the report,” said the company’s statement, adding that it was considering the appropriate legal and governance processes available to address the commission’s adverse findings.

“The Kopano Trust remains in existence and continues to hold shares in Foskor,” the company said.

Foskor said it remained committed to meaningful transformation, sustainable black ownership and employee participation, and to meeting its regulatory and governance obligations.

Head of corporate affairs at the IDC, Tshepo Ramodibe, said the company learnt of the commission’s findings four months ago, and the IDC continues to receive regular updates about the engagement between Foskor and the commission.

“Foskor has advised the IDC that it does not accept the commission’s findings that it misrepresented its B-BBEE status, engaged in fronting practices, or was not entitled to claim black ownership through the Kopano Foskor Employees Trust. Foskor also advised that it made representations to the commission and submitted supporting documentation,” said Ramodibe.

About the current status of the trust, he said “it has not been wound up or replaced since the commission’s investigation commenced. Foskor has indicated that options relating to the future structure remain under consideration.”

It showed a failure of a government subsidiary to comply with established laws and regulations—  Advocate Thembinkosi Edwin Gumbi

Gumbi said while he was shocked by the commission’s findings, he was not surprised. “It showed a failure of a government subsidiary to comply with established laws and regulations.”

Although he did not mention a specific contract, he said he was aware that Foskor received contracts on the basis that it ticked all the right boxes on its BEE scorecard. He also raised the issue of parliament’s standing committee on public accounts (Scopa).

“We wonder what would the department of trade, industry and competition say to Scopa about this mess,” he said, adding that the trust would now lay criminal charges against Foskor for misrepresentation and fronting.

Commission spokesperson Mofihli Teleki confirmed that although its damning findings against Foskor remained intact, it had elected not to wield any of the punitive measures at its disposal. The commission would neither pursue criminal charges nor seek Treasury-sanctioned blacklisting, and it would not ask the courts to nullify contracts that Foskor may have secured using B-BBEE credentials that the watchdog found were unlawfully obtained.

He explained that the commission had a series of meetings with Foskor in which the company demonstrated that 50% of the trustees had been appointed by employees themselves. The company also argued that employees could not have been prejudiced financially because the shares held on their behalf were effectively worthless. The company said by 2014 its value had fallen so much that the debt tied to the transaction exceeded the value of the shares, leaving the employee trust with a negative value. Put simply, there was no profit to share and no financial benefit for employees to lose.

The department of mineral and petroleum resources failed to answer questions about whether Foskor obtained mining licences on the back of its B-BBEE credentials that the commission has now declared defective and non-compliant.