BEE Ownership, Sale of Asset, Black investor
5 min read
By Bruce Hunt | 24 October 2023
Companies in South Africa can recognise ownership points on their BEE scorecard by selling a property, business or subsidiary to Black investors – just as they would if they concluded a BEE deal. This is called a Sale of Assets (SOA) transaction. This is called a Statement 102 Transaction.
Our multinational and listed clients have experienced firsthand the success of using Statement 102 transactions as an effective transformational method to achieve their BEE ownership goals.
We have successfully concluded over R900 million in Sale of Asset property transactions.
The Statement 102 of the Codes of Good Practice on Broad-Based Black Economic Empowerment 2013 allow for the sale of assets or businesses to contribute to ownership points. For instance, companies may sell off divisions, brands, property, industrial facilities, equity shares in subsidiaries, or a businesses as a going concern.
These transactions may not include:
A seller claims a Sale of Asset Black ownership credit when selling a productive asset to a Black investor. The seller or “measured entity” who concludes the transaction may then claim the benefits in its ownership scorecard. The practical effect of SOA on BEE ownership is measured by:
If the value of the asset increases over time and the purchaser’s ownership credentials improve, so too does the percentage of BEE ownership for the seller, but this also works in reverse.
SOA transactions are supported by the dti and the BEE Commissioner as they increase Black Ownership and participation in the economy through ownership and control of assets and businesses.
The legislation provides companies with evergreen Black ownership credits when they facilitate and grow Black-owned businesses subject to certain conditions.
In traditional BEE ownership structures, the BEE investor is often a minority investor and has limited influence on the strategy and management of the investee company. But when a BEE investor buys and controls an asset, there is often full operational control.
This allows for BEE entrepreneurialism and enables the BEE entrepreneur to continue to build the business by running a well-established Black-owned entity.
Mines required 26% Black ownership to extend mining rights, so the Department of Mineral Resources allowed mines to claim credit through:
They initiated the selling of mines, either entirely or in part, to 51%-Black-owned emerging mining companies – and the mines received Black ownership credit as if they had introduced minority shareholders. In fact, so successful was this strategy that a number of significant Black-owned mining companies were created.
Example: Selling property to a Black investor
A seller sells a property to a Black investor and enters into a long-term lease.
To facilitate the transaction, the seller can provide vendor support, via:
In return, the seller of the property would require:
The asset must be valued and compared to the value of the entire business, because this is the basis for recognition.
In essence, therefore, if the asset is worth 10% of the business, the company can be regarded as having sold 10% of its business. If the new owner is 100%-Black-owned, the company will get a BEE ownership credit of 10/100X100%, but if the new owner is only 51%-Black-owned, the company will get 10/100x51% = 5.1%.
This ownership is re-measured for three years and then locked in.
The codes are drafted so that companies are rewarded for selling assets that are likely to appreciate – or at least hold their value relative to the value of the seller. This is achieved by annually revaluing the asset sold, relative to the seller, for three years.
If the asset sold is what you might call a “dog” and reduces in value compared the seller, the credit decreases through the calculation.
We advise that there is a lock-in period of at least three years in which the Black ownership of the buyer must be annually recalculated. This also ensures that the asset is not “flipped” for a profit, and the seller loses its BEE ownership credit. After three years the BEE ownership credits are locked in, giving the buyer flexibility to manage the asset without impacting the seller’s BEE credits.
The significant benefits that accrue to the seller often result in the seller providing more vendor support than in many other transactions. In fact, in Transcend’s extensive experience, a Sale of Asset transaction costs the seller only 1/3 of a traditional BEE minority transaction, while creating significantly more value for the Black investor.
The codes define a “separately identifiable related business” as a business that is related to the seller by virtue of being a subsidiary, joint venture, associate, business division, business unit or any other similar related arrangement.
The business should have:
The ownership points available following an SOA transaction will be recognised only in the case of a “qualifying transaction”; i.e. one that involves the sale of an asset, a business or shares, and that results in:
A qualifying transaction can’t be claimed as B-BBEE ownership if a repurchase transaction is entered into within three years of transaction implementation.
The seller must include equivalency percentages in its ownership scorecard, as if those percentages arose from the sale of equity instruments in the seller to Black people.
On transaction date and for the first three years:
From year three onwards:
On each measurement date after the third year, the seller will recognise ownership points based on the ownership indicator percentages achieved in the third year post-transaction.
Here is how the sale of assets/business might be calculated:
Company X sells a division of its property to Y, a BEE company.
The equity equivalency percentage, A, is calculated with this formula:
The company would be able to recognise 15% Black ownership.
Since 2005, Transcend Capital Services has served as a specialist B-BBEE transaction advisor to multinationals and national entities, advising on 200+ transactions to date. Our in-depth understanding of the practical complexities of Black ownership, together with our experience of both corporate finance and regulatory environments, means that we combine best practice with innovative thinking to achieve true transformation.
Let Transcend help you. It is important to fully investigate and analyse the options and implications of a prospective SOA transaction, in order to identify what makes the most sense for your business – and which route will yield optimal B-BBEE compliance for you.
Bruce Hunt
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