Following the publication by the Department of Trade and Industry of the threshold for the registration of "Major B-BBEE transactions", which required that transactions resulting in ownership recognition with a value equal to or exceeding ZAR25 million be registered with the BEE Commission on or before Tuesday 8 August 2017, there has been a flurry of registrations with the BEE Commission. But what can we expect from the BEE Commission in terms of how these transactions are assessed?
Rachel Kelly of the BEE legal team at Hogan Lovells says that the BEE Commissioner was appointed to guide companies on issues relating to the implementation of the B-BBEE Codes as well as to monitor and identify fronting practices, which the Commissioner is then empowered to address by initiating legal action or via issuing a report to the National Prosecuting Authority or the South African Police Service. Ownership, being shareholding by black people, is a priority element of the B-BBEE Codes, hence the registration requirements which have now been put into place.
Andrew Bizzell of BEESA Group, being a BEE consultancy, which works closely with Hogan Lovells on BEE issues, explains that BEE ownership transactions have been assessed in the past by each company’s verification agency whose role has been to calculate the BEE points related to the ownership claim being made on the company’s B-BBEE Scorecard. The verification agencies were required to calculate these points, but these agencies did not have the power to assess any further aspect of the equity ownership structure. As a result ownership transactions have not been tested against their alignment to the spirit of the B-BBEE Codes.
Nwabisa Piki, the CEO of Equity Exchange, has highlighted the BEE Commissioner's statements that ownership transactions involving black people must represent the nature of a normal ownership transaction. Any ownership transaction that represents a skills development, enterprise development, supplier development or socio-economic development equivalent "disguised" as an ownership transaction will not be accepted and any related benefit will cease to be claimable on any related party’s BEE certificate. This may have far-ranging consequences for companies that have previously claimed ownership points under such transactions.
Bizzell says that the most common BEE ownership structures involve trusts as a "black shareholder", with black people (and, in particular, black women) as trust beneficiaries. The majority of these trusts targeted education or skills development activities. However, the BEE Commissioner has stated in the past she will not accept these structures, as these trusts place limitations on the ability of the black shareholder (namely, the trust beneficiaries) to utilise their ownership rights and benefits. The argument goes that, if the other shareholders are not required to utilise dividends received towards education or skills development (as the case may be), why are the beneficiaries of the trust being so restricted? The BEE Commissioner is specifically concerned in this case with the degree of unfairness being applied when non-black shareholders do not face the same limitations.
Hogan Lovells is of the view that companies are struggling with this view for two reasons – firstly, there are many companies wishing to enter into empowerment transactions for the express purpose of providing educational opportunities or to carry out socio-economic development activities for the benefit of people who otherwise would not have had access to such opportunities. Secondly, in most cases, the companies establishing such trusts generally have to fund the transaction through contributions or donations. There is, it seems, far greater willingness on the part of corporate South Africa to fund altruistic activities for the benefit of a broad-base of people, rather than simply looking to benefit particular individuals.
Piki says that there is a limited availability of black people with the financial means to acquire shares through personal wealth, and that there are many companies that do not represent an attractive investment as they do not produce a return for shareholders that is sufficient to attract an investor with cash. Therefore most companies are left with the reality that they will have to include commercial finance in their transaction or fund the transaction themselves.
Bizzell reiterates that trusts generally do not have the investment capital or ability to raise capital to participate in ownership equity transactions. For those companies wishing to enter into broad-based transactions with trusts, they are generally opting to finance the trusts themselves, which may well create an expectation that such financial support should allow for the inclusion of certain limitations or requirements. It is unclear at this time if such expectations will be acceptable to the BEE Commissioner and how companies will respond in the event that the BEE Commission ultimately fails to grant such recognition.
We are of the view that the position seemingly taken to date by the BEE Commissioner may be up for challenge, otherwise measured entities may simply amend their ownership structure to eliminate any limitation on the black shareholder’s rights and benefits. As to the place of trusts in BEE ownership transactions, these may not presently be viewed favourably by the BEE Commission but, for the moment at least, they remain valid legal entities through which to create empowerment structures.
