The newly operational Broad-Based Black Economic Empowerment (B-BBEE) Commission, in seeking to ensure that the transformation agenda continues to gain momentum, has highlighted how B-BBEE will be measured and stressed the issues that the commission will be clamping down on, with associated penalties and implications for non-compliance.
The revised Codes of Good Practice, Sector Codes and Procurement guidelines have collectively resulted in a revised scorecard with higher requirements to achieve specific contributor level recognition.
The requirement for an ownership transaction has been identified as one of three priority elements under the Revised Codes of Good Practice. At its core, the objective is to change ownership patterns within the South African economy, with a targeted minimum of 25.1% ownership – although there are specific sectors and industries where this requirement is actually higher. In addition, the procurement element of the B-BBEE Scorecard also makes provision for additional points to be awarded to suppliers who meet higher ownership requirements.
It is important to focus on ensuring that all three of these characteristics are met, but it is the “Net Equity” requirement that has important implications for the way ownership deals are structured and implemented. “Net Equity” is essentially the difference between the value of the shareholding in the hands of the black owners and the value of any encumbrance on that shareholding incurred on its acquisition.
Historically, deals that sold stakes to black people were often associated with high levels of indebtedness. While these transactions might meet the first two criteria, there is no effective value transfer to black people unless the growth in the value of the stake materially outstrips that of the debt – whether through growth in value of the shareholding or the ability to pay down the associated debt.
The “Net Equity” requirement measures the growth of this equity gap through the life cycle of an empowerment transaction to ensure that appropriate points are scored on the B-BBEE scorecard. This equity gap has to grow exponentially through the lifetime of the ownership transaction and may require significant discounts under traditional funding structures. Even then, the cycle of business performance might still endanger the maximisation of the ownership points if the growth in value of the underlying business slows down.
In addition, it remains important to focus on the mix and nature of the targeted beneficiaries of empowerment transactions. There will still be the need to consider the relevance of strategic partners, but also a broader beneficiary base which ensures maximum adherence of a transaction to the requirements of the ownership scorecard including broad-based beneficiaries and new entrants.
The functions of the commission will include compliance, investigations and enforcement and research, analysis and reporting. A key function will be the registration of new “major B-BBEE transactions”, which will effectively allow the commission to vet the details of the transaction to ensure it demonstrates the required criteria. The proposed threshold for registration of major B-BBEE ownership transactions, announced in November 2016, is R100 million, calculated by either combining the annual turnover of both entities or their asset value. This announcement is significant for the South African corporate sector, given that the threshold would likely require the majority of B-BBEE ownership transactions to be reported. This requirement would have retrospective effect, as all major B-BBEE ownership transactions concluded on or after October 24 2014, must be registered with the B-BBEE Commission within 30 days of the final publication of the threshold.
The registration of major B-BBEE ownership transactions will effectively allow the commission to vet the details of the transaction to ensure it demonstrates the required criteria.
In addition, certain entities, including all JSE-listed companies, will be required to submit a compliance report to the commission on an annual basis. The areas that the commission is likely to focus on include, but are not limited to, overly complex structures, lack of minority rights protection, corporate governance failures and third party facilitation.
A key area to take note of is the emphasis that the commission has placed on fronting practices. Over the past six months, complaints received by the commission have been largely attributed to fronting. The commission has stressed that it will be focusing on around ownership, but also on practices which could impact other elements of the B-BBEE Scorecard.
Indicators of fronting in ownership transactions are “window-dressing” which would include cases in which black people are appointed or introduced to an enterprise on the basis of tokenism. It also includes “benefit diversion” where the economic benefits received as a result of the B-BBEE Status of an enterprise do not flow to black people in the ratio as specified in the relevant legal documentation. “Opportunistic intermediaries” include enterprises that have concluded agreements with other enterprises with a view to leveraging the opportunistic intermediary’s favourable B-BBEE status.
The commission has put in place a defined complaints procedure which enables the reporting and investigation of suspected contraventions of the requirements. Such investigation processes can be lengthy and have severe penalties for transgressions.
This requires a clear and detailed understanding of the provisions of the relevant codes and policy documentation and a proactive approach to designing and engaging with structures that meet the requirements but also ensure that companies remain able to grow and thrive.
This article was extracted from Moneyweb