South Africa: Renewable Energy Project Developers And Their Legal Personality Change In Control: What Does It All Mean?

During December 2011, the Department of Energy (DOE) selected 28 project developers as preferred bidders under their Renewable Energy Programme to produce part of the initial 3,725 MW of renewable energy between 2012 and 2016. The preferred bidders have until 19 June 2012 for their projects to reach financial close and conclude all of the project agreements with the DOE and Eskom Holdings SOC Limited (Eskom).

The project agreements include, amongst other agreements, the Power Purchase Agreement (PPA). A selected project company, as the producer and seller of renewable energy, has to conclude a PPA with Eskom as the buyer of the produced renewable energy. In addition, the selected project company also has to sign and execute the Implementation Agreement (IA) with the DOE. The role of the DOE goes beyond the mere qualification and selection of the project developers and extends to the monitoring of any change to both the legal personality of the project company as well as their holding company.

The prior written consent of the DOE

From the release of the Request for Proposal (RFP), the DOE has made it clear that it has to give its prior written consent for any change to the membership or structure of the project developers. The original position taken by the DOE at the very outset of the RFP in August 2011, and throughout the updates of the RFP through briefing notes up to and including the release of briefing note 8 on 2 February 2012, has not changed.

The provisions of clause 20.2 of Part A of the RFP state as follows –

"No change is permitted to the membership or structure of any Bidder and its Members (including but not limited to a Change in Control), other than in respect of a listed company, after submission of Bid Response by a Bidder in respect of a Bid Submission Phase without the prior written consent of the Department. A change in any Bidder's membership or structure will include a change to the percentage of membership in the Bidder by each Member or the intended percentage or shareholding in the Project Company by each Shareholder (including but not limited to a Change in Control) or a change in the identity of the Bidder's Members, Contractors or Lenders.)¹

The broad language of clause 20.2 above makes it clear that the DOE is not only concerned with change in control as that concept is used in the Companies Act 71 of 2008 (Companies Act).

Under the Companies Act, control is directly linked to the ability of a person to control the majority of the voting rights of that company, or the appointment of the directors who control a majority of the votes at a meeting of the board of directors.

The provisions of the RFP go further than the Companies Act and include a change in the actual membership or structure including, but not limited to, a change in control, regardless of whether the change has an effect on the majority of the voting rights or the appointment of directors of the company who control a majority of the votes at a meeting of the board of directors.

The project developer selected by the DOE has to immediately notify the DOE, in writing, of any change contemplated by the project developer, with full details of the reason for the change, the parties involved and the impact on the project developer. The DOE requires the project company to submit information in respect of such a new party.

Impact of any changes

The DOE has reserved for itself the right to require the project company to supply all necessary information as requested by the DOE in connection with the change contemplated by the project company. The request for additional information is for the DOE to consider holistically the impact of such a change to the project company and whether the project company maintains the status it sought to portray at the time of the submission of the bid response.

If the project company undergoes any change without the prior written approval of the DOE, the DOE may allow a reasonable amount of time for the project company to propose a restructuring of the project company, to the satisfaction of the DOE. In the alternative, the DOE may, in its sole and absolute discretion, disqualify the project company from participating any further in the relevant bid submission phase or to allow the project company to continue in the procurement programme at all.

At the time of submission of the bid response by the project developer it also has to accept the terms and conditions of the IA including clause 16 which repeats the provisions of the RFP.

Clause 16(2) provides that from the commercial operation date of the facility of the project developer and for the duration of a three year period, the project developer has to ensure that there is no dilution, sale, assignment, cession, transfer, exchange, renunciation or other disposal of the whole or any part of the equity or issued share capital of a shareholder.

In addition, clause 16(3) provides that, for the period of 20 years, the project company has to ensure that no dilution, sale, assignment, cession, transfer, exchange, renunciation or other disposal of the whole or any part of the equity which results in the project company being in breach of the undertakings with regard to the ownership element obligations under the IA and/or the shareholder loans of any black person or black enterprise. Through the RFP as well as the provisions of clauses 16(2) and 16(3) of the IA, the DOE seeks to know the legal personality of the project company and the entities that control the project company at all times.

The DOE seeks to have full knowledge of the entities with which the project company enters into contracts directly or indirectly. In terms of clause 16(1) of the IA, the prohibition of a change in control without the prior written consent of the DOE is not limited to the change in control of the project company but extends to the holding company of the project company.

Accordingly, the DOE will also need to give its prior written consent for changes at the level of a company of which the project company is a subsidiary.

Socio-economic development under the RFP

Typically, parties to a contract will agree to an immediate termination of a contract where a breach of the terms of the contract in the form of an act or omission is so egregious as to go to the essence of the agreement and is not capable of any remedial action. The breach of any of the socio-economic obligations under the RFP and the IA also attracts the same consequences, immediate termination of the IA and other project agreements. It comes as no surprise that the DOE insists on having full knowledge about the control of the project company and the holding company of the project company.

The DOE has to grant its prior written approval to the project company and the entities with which the project company contracts, particularly where the ownership element obligations under the socio-economic development requirements set out in the IA schedule are not complied with.

In terms of clause 18.3 of the PPA, it is a seller default warranting immediate termination of the PPA (without a remedy period afforded to the project company) by Eskom where the project company fails to comply with the economic development obligations.

The DOE's position is that throughout the life of the PPA and the IA the project company is obliged to fulfill and comply with the socioeconomic development requirements and the DOE has to have full knowledge of that status at all times.

Failure to do so will result in the immediate termination of the PPA and thus of the IA and other related project documents. Project developers have no option but to ensure that they comply with their socio-economic obligations at the bid submission phase and throughout the 20 year period of the project.

Conclusion

The DOE has refused to disclose any information on the criteria it will use to evaluate the submissions or applications for prior written approval in respect of any change contemplated by the project company or the company in which the project company is a subsidiary.

The DOE is dealing with bidders and preferred bidders in addressing matters associated with socio-economic development matters, including, amongst others, local content procurement, skills and black economic development in an uncharacteristically stringent manner.

It has to be said this is one of many ingenious ways in which the DOE can control changes in control and monitor any potential fronting by project developers. In so doing the DOE appears to be ahead of the curve in implementing the principles espoused by the Department of Trade Industry (DTI) in the proposed amendment to the Broad-Based Black Economic Empowerment (B-BBEE) Amendment Bill 2011 (B-BBEE Amendment Bill).²

Footnotes

1 The Department of Energy Request for Proposals for Independent Power Producers under the Renewable Energy Procurement Programme, August 2011.

2 See General Notice 893 of 2011, issued and signed by the Minister of the DTI on 7 December 2011 (Government Gazette No 34845).

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