The BEE Codes of Good Practice (“the Codes”) requires that all entities operating in South Africa make a contribution towards the objectives of Broad-Based Black Economic Empowerment.
Compliance with the BEE Codes of Good Practice can appear daunting for Multinationals who may not understand the various BEE ownership options available to them in the context of the South African BEE Legislation and the socio-political environment.
The good news, however, is that through a variety of options and related strategy design, the Codes have made provision for the recognition of ownership through alternative contributions that multinationals can participate in.
The Codes of Good Practice and Multinationals
The Codes define multinationals as “measured entities with a business in the Republic of South Africa and elsewhere, which maintains its headquarters outside the Republic”.
The BEE Act does not contain any exemptions for multinationals doing business in South Africa and a general principle is that foreign companies doing business in South Africa are required to comply with the requirements of the BEE Codes and will be measured on the same criteria as any other South African company.
The South African government’s Department of Trade and Industry (DTI) says that most Multinationals may have global practices preventing them from complying with the ownership element of B-BBEE through the traditional sale of shares.
While multinationals can still score highly on the BEE scorecard against the other pillars (including, Management Control, Skills Development, Preferential Procurement and Enterprise/Supplier Development as well as Socio-Economic Development), there are increasing pressures on companies doing business in South Africa to meet Ownership targets.
Alternative ways to approach Ownership to receive recognition
Below is a brief outline of the alternative ways that corporates can achieve black ownership and receive recognition on the Ownership scorecard:
- Direct shareholding – the sale of shares to black-owned entity
- Indirect shareholding – shareholding through multilevel structures of ownership
- Sale of Assets – the measured entity may sell an asset (including shares in another company) to a black-owned entity
- Broad-Based Ownership Schemes, Employee Share Ownership Schemes and Trusts - the sale of equity to private equity funds, broad-based structures, employee share ownership schemes or trusts whose beneficiaries are at least 75% black
- Equity Equivalent (For Multinationals) – the implement socio-economic growth initiatives (e.g. priority skills programmes, enterprise creation etc) as opposed to giving up actual equity. These programmes must be approved by the DTI
Ownership solutions for Multinationals
For multinationals whose global practices might prevent them from engaging in the traditional sale of shares to black South Africans, there are a couple of options that might be used to achieve BEE ownership recognition.
Sale of Assets
An increasing number of businesses are taking advantage of the Sale of Assets BEE Ownership recognition opportunity.
In a nutshell, Sale of Assets involves an entity selling a productive asset to Black investors. The term “asset” includes hard assets like property and plant but also includes equity investments and businesses.
The percentage of BEE Ownership that can be recognised is driven by the relative value of the asset sold to the value of the selling entity, and the Black ownership credentials of the purchaser. As the relative value of the asset sold and/or the purchaser’s ownership credentials increases, so does the percentage of recognised BEE Ownership for the seller.
A few reasons why this is an increasingly popular approach to BEE Ownership, particularly amongst multinationals, include:
- In a somewhat shaky economic and socio-political operating environment, having more liquid assets is preferred;
- There may be an opportunity for positive BEE implications in various places on the BEE scorecard; and
- It does not raise concerns from foreign decision-makers about dilution of control or realising fair value, and may then be more palatable and easier to execute.
BEE Ownership is a ‘Priority Element’, and if a minimum threshold of Net Value is not achieved, then a measured entity will be penalised by dropping a level on its BEE status.
In a Sale of Asset transaction, instead of looking at value of shares in Black hands and related debt, you need to rather assess the value of asset acquired by the Black investor, and related outstanding debt in financing the asset acquisition.
Equity Equivalent Programmes
The DTI has introduced the Equity Equivalent Investment Programme which allows eligible multinationals to recognise BEE Ownership without diluting existing shareholders. It can however be costly, lengthy, and complex to design and receive governmental approval for an Equity Equivalent Programme.
The successful implementation of such a programme requires experience in dealing with key stakeholders, including the DTI, as well as detailed technical knowledge of the process.
Please contact us:
Transcend Capital provides you with the expertise you need to develop and communicate a tailored BEE Ownership Strategy that is sustainable and makes business sense. Should you require more information on this offering, please do not hesitate to get in touch with us to arrange a call.