BEE and the new (post Covid) normal

There has been a lot of talk of the “new normal” since Covid-19 started ravaging the globe and wreaking havoc in economies.  The South African economy has declined, off the low base which of a recession even before lockdowns.  In amongst this all, we were hit with load shedding, staggering unemployment, appalling allegations of corruption during lost nine years before and even during the pandemic and an inadequate rollout of vaccines. Government has never looked less competent or more corrupt.

Inevitably South Africans looked for scapegoats and blame has been cast on the health products regulator, the politicians avoiding step-aside rules, Eskom management, SAA’s business rescuers, dividend taxes, broad-based trusts and even the concept of BEE itself.

This is not without reason: aside from well publicized corrupt deals using BEE and emergency procurement legislation, with the continued deterioration of the economy even more BEE schemes went “underwater” (meaning that, mainly because of debt, black beneficiaries were not getting the benefits expected).  So, when President Ramaphosa suggested in early June 2021 that BEE legislation needed an overhaul, there seemed to be an admission that BEE wasn’t working.

While the public perception of BEE is often associated with corruption, behind the scenes it hasn’t been an unmitigated disaster.  After all, the President suggesting the BEE overhaul, is a successful black businessman who used BEE to his advantage.  Most successful black business owners with mansions, luxury vehicles, children at elite schools visiting five-star game reserves have paid for these with hard and ethical work.  Some may have benefitted from the BEE framework, as intended, but they did not do so illegally.  Some may have been advantaged by their race, but not unfairly (as we set out in a previous article BEE is fair discrimination.  So, has BEE completely failed? It’s hard to argue that it has.

Obviously, these are relatively few and far in between examples, and there are many who have not obviously benefitted from BEE.  Far too many South Africans are not active economic participants through no fault of their own.  BEE objectives are still aspirational, and BEE has not achieved what it set out to do.  But it is even more clear that South Africa still needs to achieve the objectives of BEE: a more fair and more inclusive economy. This goal is in line with Global development goals and in line with the thinking of Doughnut economics. It’s, in many ways cutting edge.

At the same time as the President suggested an overhaul of BEE, his cabinet signaled what might not be changed.  The Minister of Tourism (now running our Health Ministry) promoted a Tourism Fund exclusively for black owned establishments.  The Minister of Finance lodged an appeal against a prohibition on government awarding contracts to black owned businesses only.  The Minister of Trade and Industry confirmed that broad-based trusts and employee ownership schemes are key operating in South Africa.  The Minister of Mineral Affairs and Energy awarded contracts to BEE businesses without considering our environment at all.  If anything, these actions confirm that Government puts BEE before all other considerations.

But it is not only national Government.  The Steve Tshwete Municipality (together with the NEF) set up a Fund exclusively for majority black owned SMEs.  And, while sacrificing investor protection (which the President needs to attract the R1.2 trillion he has targeted), the Competition Commission stopped the dilution of black ownership of Burger King, even though competition, job creation and black shareholder votes all indicated the deal was good in every other way imaginable.

While the owners of Burger King (Grade Parade, a BEE entity) have challenged the Commission, it is clear that the Commission must consider black ownership in assessing ownership.  Since 2019 the Competition Act requires an assessment to be made levels of ownership by historically disadvantaged people.  The Commission considered this to be more important than all other considerations.  If a Court agrees, then all three branches of Government: Executive, legislature and judiciary have confirmed BEE to be the most important consideration for our economy going forward. Only in the distant future will we know if this is the right call.

Unfortunately, the most compelling argument for abolishing BEE is how it has been abused in corrupt transactions, and the speed with which Government is moving to address this is the most compelling argument to believe that BEE will not go away any time soon.

Wasted opportunities are rued, but we are where we are, and if we remain here all economic and all empowerment activity is in jeopardy.  So, how should BEE be revised?  We can suggest many changes, but we could also start with using to Government procurement to advantage black businesses.  So, when looking at competitive bids, consideration should be given price, quality and BEE.  BEE should not be the be all and end all, but it should be a factor – whether through pre-qualification of deals (the current route) or through the old 90:10 or 80:20 scorecards.

On this basis South African businesses, especially those forced by Covid-19 on domestic customers, should not think that BEE is not part of the “new normal”. It’s not, as we’ve argued repeatedly, going away.

To paraphrase Darwin: “It’s not the strongest who survive and thrive, it’s the most adaptable”.

If we can help you adapt to BEE ownership requirements, please contact us.

Deemed BEE ownership

In this article we discuss several ways to legitimately achieve BEE ownership points, without having actual BEE owners. This is called ‘deemed ownership’.

A recap on why achieving actual BEE ownership is so *damn* hard

Ownership is the trickiest part of the BEE Scorecard.  Consider that sometimes, the owners are not committed to BEE with good reason E.g. multinationals based outside of South Africa in markets which reprioritize their own citizens’ wellbeing over South Africans.  International players look at the whole world as their playing field.  South Africa is one market of many, and it is assessed against others.  Ease of doing business is a factor, and BEE (or other) shareholders make it harder.  This is further complicated when the rules are in flux or unclear.  It is well documented that BEE in of itself does not attract investment and often deters it.  Sometimes this further sets back the objectives of the BEE Act (see our forthcoming article on the competition commission and Burger King for more).

Just the same as multinationals prefer to control their own destinies, smaller businesses such as entrepreneurial startups or family businesses, are setup by the type of business owners whose strength often lies in them being in control.  Their commitment to the business and not having to answer to others, gives them the agility to grow this part of the economy in a way no other companies can.  Furthermore, these owners commit so much more than just funds to a business which they would not be properly rewarded for by pure financial investors. Indeed, one of the most frequent frustrations we come across is business owners who have done a BEE ownership deal only to find that their new shareholders are not active in the business operationally (or at least, not with the same passion as the founding shareholders).

Then there are those who would love to do a BEE deal but cannot because they cannot find suitable black partners.  Sometimes it’s because they are unrealistic in the amount they want from them or expect them to contribute more than their fair share or to contribute unethically (yes corruption…) but sometimes it is because astute black investors do not believe there is a good investment thesis to their involvement.

In the end, the founders and shareholders of family businesses are so invested in them, with their identities and success so entwined with their business, that they also cannot be unemotional in assessing their businesses.  This is made worse still when they contemplate being minority shareholders in their own businesses.  And, to be fair, in smaller organizations, these are personal relationships.  Finding partners with the same values, ethos and culture (and funds) is key to success but does cut the investor pool significantly. A small investor pool always puts downward pressure on valuations, further hampering the deals.

Then there is the financing of the deal itself: one of the one of the most common misconceptions is that one is forced to give shares in a company away.  This is often linked to a shortage of suitable black business partners, with adequate funds.  Ironically this is precisely what BEE aims to rectify.  But for now, this has been recognized with the rules around vendor finance.  This means that black investor, even if they do not have funds, can be assisted to pay for their shares by the seller.  This is done through dividend flows or through the movement in the share’s valuation (especially in listed shares).  But neither of these is guaranteed and are risky.

These and other reasons make ownership the hardest part of the BEE Scorecard to address.

Deemed ownership:

What many do not often appreciate, is that the BEE Codes allow for entities to be treated as black owned, even if they are not.

Of course, there are clear terms and conditions to this.  But there are many ways to be treated as black, without giving up actual shareholding.  These deemed ownership structures can if done properly meet the letter and spirit of the BEE Act without running the risk of fronting.  So, there are more options than simply selling shares available for BEE ownership points.

This article briefly explores some of these.


The most common form of non-black BEE ownership is provided for of Code 100 which provides “where in the chain of Ownership, Black people have a flow-through level of participation of at least 51%, and then only once in the entire ownership structure of the Measured Entity, such Black participation may be treated as if it were 100% Black.”

A simple reading of this means that one could have 49% non-Black ownership and that it can be treated as Black owned.  Even though this can only be done once in an ownership it is possible for an entity to be treated as 51% Black owned, even if effectively only 26% (51% of 51%).


In terms of 3.6 of Code 100 the Minister of Trade and Industry may designate certain organs of state or public entities as B-BBEE facilitators and they will then be treated 100% Black owned.

Controversially, facilitator status was granted to Telkom in 2019, which is only partially (40%) state owned.  This allowed Telkom to be deemed to be 100% Black owned despite only 42% of its free float being South African owned, let alone Black owned.  This distorted competition in the telecoms sector and was challenged in court.  In the Altron v Minister of DTI this was set aside as fatally flawed.

As this section is only available to organs of state and public entities, this is unlikely to feature in many ownership structures.


3.9 of Code 100 addresses broad based ownership schemes and employee share ownership programms (ESOPs).  Similar provisions are contained in 3.12 for non-discretionary trusts.  In terms of this it is possible to look through these schemes to get the effective Black ownership.  So Black employees, for example, who are not registered shareholders of their employer may contribute its Black ownership if they are beneficiaries of a qualifying scheme.

There are limits and conditions on such structures in Annexures 100(B) ,100(C) and 100(D) of Code 100, but it is possible to have one shareholder treated as Black, instead of thousands of individuals (who are not actual shareholders).  This is administratively simpler at the very least.

As only 85% of the value of benefits allocated by the scheme must be allocated to Black people, it is possible for up to 15% of the benefits to be allocated to others.

However, the B-BBEE Commission has cracked down on abuse in these structures, especially with regards to the requirement that participants must take part in “managing the scheme at a level similar to the management role of shareholders in a company having shareholding.”

This has been an area is an area in regulatory flux and uncertainty and, despite the recent gazette by Minister Patel clarifying this section of the codes, it should be approached with caution.


Statement 102 allows an entity to sell part of its business or assets to a black-owned company and to claim a pro-rata ownership as if it had sold its shares, even if it has not.  Let’s say a business were to sell a division that represents say 40% of its business to a 100% black-owned company, it can claim that it is 40% Black owned, even though it has not sold any shares at all.

There are some valuation challenges (as set out in detail in our article on Statement 102) but if properly managed this ownership can be claimed in perpetuity after the third anniversary, and may be particularly attractive from a control point of you.


3.13 of Code 100 allows for option holders to be treated as shareholders, before they exercise their options (and before they are really shareholders) as long as they have the economic interests and voting rights that they would have had had they been shareholders and provided that this irrevocable for the option period.

As option holders enjoy the benefits of shareholding (for free or a fraction of the share value) there is no reason to exercise an option before its expiry.  But expiry this has to be seriously assessed.  At this time the Black shareholder is better informed and, ideally, better financed to exercise the option.  But until exercising, the ownership is deemed to be Black even if the grantor of the option (the real shareholder) is not.


Many foreign listed groups do not want to deal with minority shareholders and are particularly challenged by the BEE ownership criteria.

Statement 103 was put in place to allow multi-nationals to support BEE without diluting the ownership in their South African subsidiary, as long as they commit to invest in Black businesses an equivalent amount to what such a minority interest would have been worth.  So, if, for example, a South African subsidiary is valued at R1 billion and the foreign holding company commits to investing R340 million it can claim to be 34% Black owned, while remaining 100% owned by the foreign company.

This is not only not available to South African owned entities, it comes with its own challenges (see the article on this). This ownership is structure is only open to multinationals and does require specific ministerial approval but does allow ownership to be protected.


3.10 of Code 100 allows a private equity shareholder to be considered as Black as long as the Manager and the Fund meet certain criteria.  There’s no criteria applicable to the investors in the Fund itself, and they need not be Black.  The private equity rules took cognizance of the reality that private equity investment is often sourced from international (i.e. not Black) markets.

Essentially the Black private equity manager’s BEE credentials are given to the Fund, for as long as it and the Fund is compliant.  The Fund must after eight years have the majority of its investments in Black businesses.

These rules are used by Tusker in an innovative way that allows for deemed ownership without actual ownership but does require a commitment to the BEE Act.  We are confident that this can a cost benefit analysis will show the merits of BEE ownership, and it’s far faster and more economically attractive position than equity equivalents for foreign multi-nationals.


When considering BEE ownership for your business, you should make sure to address the following:

  • Does BEE ownership add value (or reduce value destruction) in your business? The acid test for this is whether you will be able to compete for more work by having the appropriate level of BEE ownership.
  • Does the structure/solution you’re considering meet letter and spirit of the BEE Act?
  • Is the structure/solution financially affordable? Are the magnitude and timing of cash flows known with certainty in advance?
  • What degree of control do you retain over the decision-making in your business?
  • Can the structure/solution be unwound if needed?
  • Are the vendors of the proposed solution/structure well established and trustworthy?
  • Has the proposed structure/solution been successfully scrutinized by the B-BBEE commission?

If you have any questions, feel free to contact us

How to achieve BEE ownership when you can’t (or won’t) change your actual shareholding?

All businesses operating in South Africa are affected by the B-BBEE laws. While compliance with BEE is entirely voluntary, in practice the scorecard system means that it’s very hard to avoid. Typically, your customers put pressure on you to comply or they move their business elsewhere. Then the question becomes how to comply – and while all other scorecard elements can be ‘bought’ by spending on each category or employing South Africans of colour, ownership is both the hardest ‘pill to swallow’ and offers the greatest advantages too (see our previous articles on the value that 51% ownership can achieve).

But what happens if your business can’t or won’t change its actual ownership?

This is the situation that most foreign owned companies operating in South Africa find themselves in: their governance structures simply don’t allow for any local parties to own a percentage, let alone a majority stake of a small subsidiary operating in South Africa, and they’re not going to change their global rules, risk management or governance for insignificant parts of their global business or risk chasing away investors from the global capital markets they court.

In our experience, most multinationals are quite willing to do some form of BEE deal. They understand the need for it and being global, have dealt with citizen/local ownership requirements in countries with indigenous business promotion policies.

So how does a foreign company comply with BEE ownership requirements in South Africa?

The answer, until now, has been the ‘equity equivalent’ program as provided for in the BEE Codes. At a high level, this means that a foreign company can claim ownership if it invests an amount equal to a stake in other qualifying businesses, without selling any of its own equity.  So, the local subsidiary is valued and if it wants to achieve a percentage of BEE ownership it should invest that percentage of its value in local, majority black owned businesses. As an example, if the South African subsidiary is worth R100M and it wants to claim 25% BEE ownership then it needs to invest R25M into BEE businesses. Afterwards, it qualifies as 25% BEE owned in perpetuity. Given that each equity equivalent deal can be quite large, they are tailor-made and must be pre-approved by the Department of Trade and Industry. This approval process often takes years (e.g., the auto industry), leading to uncertainty and delays on both sides. As always, the valuation of the business doing the deal is key to the investment requirement that follows the deal (see our prior notes on this too).

With many regarding the equity equivalent program as slow and cumbersome, what else can be done? And what if the same solutions could work for any company, where transferring actual ownership is undesirable?

Recently, the Tusker solution was chosen by a global, public company for their local subsidiary (after several years of looking at alternatives). In their situation they wanted to make a difference to South Africa and understood the need for BEE but could never give up actual ownership in their South African subsidiary. The Tusker solution quickly met shareholder governance, control, ownership, and contribution requirements and was concluded in only a few months. Since it was a major transaction, it needed to be scrutinized by the B-BBEE commission before it could be officially registered, which it has. As with all registered major transactions, the B-BBEE commission will continue to monitor compliance with letter and spirit of the B-BBEE Act going forward.

The same Tusker ownership solution offers any percentage of black-female ownership (Tusker only offers the highest-scoring form of BEE ownership) to any company, local or foreign, where the company does not want to or cannot change the actual ownership of the business.

While the specifics of the Tusker structures are proprietary, the idea is that the shareholders of a business can achieve deemed black female ownership if they are prepared to invest in businesses that are at least 25% BEE-owned. How much they need to invest depends on valuations and the percentage of ownership they seek to achieve.

There are several important advantages here:

  • The most important word here is “invest” – it’s not an expense or write-off. The commitment to black business is an investment that will also generate investment returns for the benefit of the original shareholders.
  • Investments are phased in over eight years in predictable manner, making cash flows easy to plan and forecast.
  • The entire structure can easily be changed as a company’s BEE requirements change, are met or if BEE disappears.
  • Unlike the equity equivalent rules, this structure makes use of private equity rules and is far faster to implement.
  • Our approach allows for the sale of (or further investment into) the business without affecting its ongoing BEE status.
  • Most importantly, the biggest appeal for our customers is that this approach allows them to benefit directly from investing money into the network that supports the future of their business – the suppliers or customers adjacent to them – and thus ticks a major strategic box too. Since these are at least 25% black-owned, and our customers have a vested interest in their success, incentives are finally aligned, and very real empowerment happens.

If you can’t/won’t change your actual ownership, but are looking to benefit from black-female ownership and are prepared to invest an affordable amount into to the businesses that support yours, then please send us an email ( following which we’ll have a confidential discussion about your needs and our proprietary approach.

It works, it’s been approved by the regulatory bodies. Our clients love it.

Preferential procurement and BEE: Why Afribusiness v Minister of Finance is so important:

Two of the most common complaints against BEE are that (a) it’s frequently used as a vector for the corrupt to plunder the economy and (b) that there is substantial policy uncertainty around it (and therefore the risk that the approach you take now might fall out of favour in future). The recent judgement handed down by the SCA in the landmark case of Afribusiness v Minister of Finance goes a long way to addressing both of those complaints and is thus important to understand.

Since the SCA ruled in favour of Afribusiness, who are against BEE on principle, this judgment may be seen as a blow to black owned businesses and therefore to black economic empowerment. But we see it very differently, why?


As we have previously explained, there are provisions in our constitution to specifically allow for racial discrimination where the discrimination is intended to address the wrongs of the past.  A raft of legislation was passed to achieve this objective including the Broad-Based Black Economic Empowerment Act 2003 (“the BEE Act”).  But, importantly this Act came after the Preferential Procurement Policy Framework Act 2000 (“the Framework Act”).

The Framework Act was necessitated because of section 217 of the Constitution.  This section requires Government (including SOEs and municipalities) contracts to be awarded “in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”.  But if the Constitution stopped there, it would not facilitate economic transformation necessary for South Africa to put its past behind it.  So, section 217 goes on to allow government to implement procurement policies that provide for “(a) categories of preference in the allocation of contracts; and (b) the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination.”  The Constitution does not detail these policies but does call for legislation to prescribe the preferred framework…. hence the Framework Act.

The Framework Act then allowed points to be allocated in awarding government contracts for specific goals.  These goals include “contracting with persons, or categories of persons, historically disadvantaged by unfair discrimination on the basis of race, gender or disability”.  Goals must be clearly spelt out in in any invitation to tender and must be “measurable, quantifiable and monitored for compliance.”

Points for these goals are limited to 10%-20% of the total points, depending on the size of the transaction (unless there were equal tenders when extra preference could be given to attaining these goals).  Translated correctly, this means that while 90%-90% of a government tender must be awarded based on price/quality (i.e. the intention is that government spend shouldn’t be wasted), a BEE Company is given an advantage of between 11% and 25% over others, assuming they score equally for the other points in a tender. This is fair and equitable in the context of our history and is also transparent.  In theory, government gets the services it needs without wasting money, and competitive BEE companies win the work. In theory, a BEE company that isn’t competitive on price/quality doesn’t get the work and government doesn’t waste the taxpayers’ money. In theory. But what was actually happening was quite different…

Afribusiness v Minister of Finance.

Importantly, the Framework Act also empowers the Minister of Finance to make regulations.  The matter concerned the validity of the Regulations, promulgated by the Minister on 20 January 2017.

These Regulations included pre-qualification criteria which resulted in only qualifying tenderers to be allowed to submit bids for Government work.  These pre-qualification criteria concerned any or all of three criteria (i) BEE levels (ii) EME or QSEs or (iii) if no less than 30% was subcontracted to businesses that are majority black owned. In other words, if a tenderer didn’t meet these conditions, they couldn’t even put in a bid. It didn’t matter that the resultant bids received might be 2 or 3 or 20 times higher than the market rate, so long as the qualifying criteria were met. The cart was before the horse, with the result was that government departments ended up choosing between over-inflated tenders without reference to market pricing. Add a little collusion and corruption and you have a perfect storm of government departments significantly overpaying for under-performing contractors (but maybe receiving a bit of a kick back to ease their consciences).

Afribusiness argued that these 2017 Regulations put the cart before the horse by providing that the tenderers who qualify to tender, may first be determined according to, inter alia, race, gender and disability, and only thereafter in terms of the preference points system.  Afribusiness argued that the Framework Act does not allow for qualifying criteria, which may disqualify a potential tenderer from tendering for Government contracts.  They submitted that the first step in determining to whom the contract must be awarded is to determine which tenderer has scored the highest points on the basis of points for price and for special goals, including historic unfair discrimination on the basis of race, gender and disability.

Afribusiness argued that the Framework Act requires a two-stage enquiry: first determine which tenderer scored the highest points in terms of the 90/10 or 80/20 points system; the next stage is to determine whether objective criteria exist which justify the award of a tender to a lower scoring (i.e. higher price/lower quality) tenderer. Accordingly, parliament, through the Framework Act, seems to have limited discretion to organs of state about the award of a contract to a bidder who does not score the highest points.

What the court said:

The Court also heard that blanket ‘permission’ to apply pre-qualification criteria without creating a framework for that criteria, lends itself to abuse and the manipulation of tenders to the detriment of potential bidders (and ultimately to the detriment of all South Africans who receive less value for their taxes).

The Court held that the Minister may only make regulations ‘regarding any matter that may be necessary or expedient to prescribe in order to achieve the objects of the Act’ and that the Minister failed to create a framework with would guide organs of state in the exercise of their discretion should they decide to apply the pre-qualification requirements.

Furthermore, the Regulations do not meet the Constitutional requirement for tenders to be fair, equitable, transparent, competitive and cost-effective.  The discretion which is conferred on organs of state under the Regulations to apply pre-qualification criteria in certain tenders, without creating a framework for the application of the criteria, may lend itself to abuse and is contrary to the Framework Act.

Therefore, the Minister’s promulgation of the Regulations was unlawful.

In exercising the powers to make the 2017 Regulations, the Minister had to comply with the Constitution and the Framework Act.  The framework providing for the evaluation of tenders provides firstly for the determination of the highest points scorer and thereafter for consideration of objective criteria which may justify the award of a tender to a lower scorer.  The framework does not allow for the preliminary disqualification of tenderers, without any consideration of a tender as such. The Regulations cannot create a framework contrary to the Framework Act.

There is a year still to go:

The Court suspended its order of invalidity to enable the Minister to fix this error.  The Court has given the Minister a year. This means that we can expect ‘pre-qualifying’ criteria to remain in place for a while (and with it the ability to influence who gets the work).

What does the judgement mean?

First, it’s worth noting that the judgment goes to constitutional matters and there is therefore possible that the Minister appeals the matter to the Constitutional Court.  But even without this, the Regulations and pre-qualification criteria remain in effect for another year.  There is a hope that Government will take note immediately of this judgment and stop pre-qualification of tenders.  Unfortunately, there is also the possibility that those abusing Government procurement processes see this as their last window of opportunity and that they accelerate their nefarious work. Given the ‘hyenas’ feasting on the Covid PPE opportunities we think there is a serious chance of the latter.

Unless the Constitutional Court finds fault with the Supreme Court of Appeals well-reasoned judgment, pre-qualifications will disappear from 1 November 2021.

Does this mean that BEE Ownership will become obsolete?

First, it’s important to note that this case did not concern the BEE Act.  It was limited to the Framework Act.  The Framework Act only concerns Government contracts, while the BEE Act is broader (and more recent).  Therefore, the judgment does not change anything in respect of the private sector in and amongst the private sector.  As the BEE Act is not in question, the BEE points that any business gets from being black owned or from procuring from black businesses are unchanged.

Government contracts cannot pre-qualify as set out in the Regulations, but they must still give between 10% and 20% of their points to goals like BEE.  Therefore, it is clear that BEE remains at least partially relevant. The more commoditised your product/service/industry, the more likely that you will need to have a competitive BEE score to get anywhere. There are very few companies who can get away with a low BEE score.

All that the Court did was to confirm that BEE is not the BEE-all and everything.  The Court simply confirmed a fundamental business principle – one cannot ignore other important criteria (price, quality, capabilities etc).  It has become all too apparent from testimony at the Zondo Commission that such common sense has not been common at Eskom, SABC, PRASA, Denel, SAA and so on.  This is a travesty, but the Courts have, once again, come to our rescue and this is to be welcomed.

Thanks to Afribusiness, there is now renewed hope that South Africa can operate with less corruption, that taxpayers get more for their money, and that legitimate transformation can still be attained.

Statement 102 transactions: BEE ownership through the sale of assets

Statement 102: BEE ownership through the sale of assets:

Businesses want the same things from BEE – ownership dilution at a fair price, with simplicity and trustworthy partners without giving up effective control of the business. Minority deals are relatively easy, but given the advantages of 51% BEE ownership, the control issue becomes very important – both from the ‘achieve genuine transformation’ and ‘don’t give up anything you don’t have to’ points of view.

While at we have a proven ability to effectively address these issues through our private-equity structure, another way to do so is through the sale of assets – covered by Statement 102 of the BEE codes.

This article discusses the principles and highlights some of the danger areas. As with all things BEE, it’s not as simple as it seems…

What’s the core idea?

A white company (the ‘measured entity’) can sell off a division to black owners (the “spin off business”) and claim the relative value as ownership in the measured entity. A deal must use standard, independent valuation method(s) and the final ownership percentage claimed is based on the relative valuation of the measured entity and spin-off businesses as measured for the first three years after the deal. There are also caveats as to what kind of spin-off is valid for these deals.

For now, a simple example:

E.g 1: A measured entity (worth R100M) includes a stand-alone division (worth R51M) that is sold to a consortium of black investors. If both the measured entity and the spin off business grow at the same rate after three years their relative valuation will remains 49:51. The measured entity would then be treated as 51% black-owned in perpetuity, even though there is no actual black ownership or black control in the measured entity.This is the main attraction of s102 deals.

However, if the spin off business sold is less than 51% of the value of the original measured entity then the proportion of ownership achieved is proportionally less. Similarly, if the buyer are less than 100% Black (or if the BEE ownership of the buyer changes during the 3-year review time).

E.g. 2: The same measured entity spins off a stand-alone division (worth R25M) to a 60%-black owned company. Both businesses grow at the same rate as above and after three years the measured entity would be deemed to be 15% black owned: (25*60%)/100=15%.

What can be sold or spun off?

The measured entity can sell an asset, equity instrument (i.e. shares in a company) or a separately identifiable relating business i.e. a business that is related to the seller by virtue of being a subsidiary, joint venture, associate, business unit/division, or any other similar related arrangements within the ownership structure of the Seller.

What happens if my business doesn’t have a division we can spin-off?

By nature, Statement 102 deals exclude the vast majority of South African businesses who do not have divisions/units that would meet all the criteria to be spun off. That’s why they’re typical the domain of bigger conglomerates only. But, there is an opportunity for smaller businesses in that the spin-off doesn’t have to be old – it’s entirely possible to create a business unit that’s sufficiently valuable pre-deal, then spin that off (if this is your situation then chat to us as this can be a minefield).

What are the other criteria?

For ownership points to be recognised:

  • The transaction should be subject to an independent verification value by an independent expert. We’ve written before about valuation abuses in BEE deals and this is no different – care must be taken here, especially as for a Statement 102 transaction the valuation is done at the time of the deal and at the end of each year for three years after. There is always a chance that the year three valuer doesn’t agree with the prior methods and this can totally wreck the deal. So, fudge the valuation at your risk!
  • The sale of asset, equity Instrument and/or business must involve a separately identifiable related business which has:
    • No unreasonable limitations or conditions with regards to its clients or customers;
    • Clients, customers or suppliers other than the seller; and
    • Any operational outsourcing arrangements between the seller and the separately identifiable related Business must be negotiated at arms-length on a fair and reasonable basis.
  • B-BBEE shareholders, or their successors if the B-BBEE shareholding is the same or improved, holding the asset for a minimum of three years.
  • The transaction must result in:
    • the creation of viable and sustainable businesses or business opportunities in the hands of Black people; and
    • the transfer of critical and specialised skills, managerial skills, and productive capacity to Black people.

i.e. there are a lot of requirements/tests and given the nature of these transactions they can already be complex (e.g. what division is sold off, what capital equipment goes with it, how are costs shared, which staff move with the business etc). Every legal clause requires oversight and there a many ways in which a deal of this nature could fall foul of scrutiny by a Verification Agent or the B-BBEE Commission. This legal complexity is a major factor against these deals, but it’s not the only one.

What can’t you do:

The following transactions do not constitute “qualifying transactions”:

  • transfers of business rights by way of license, lease or other similar legal arrangements not conferring unrestricted ownership; and
  • sales of franchises by franchisors to franchisees (but a “qualifying transaction” will include sales of franchises from franchisees to other franchisees or to new franchisees do not qualify for recognition).
  • We have seen some ‘sale and leaseback’ transactions i.e. a productive asset is sold to black people who then lease it back to the ‘white’ company, however, the codes clearly state that the business transferred must have clients, customers and suppliers other than the seller.

What other restrictions/tests apply?

  • No repurchase agreement: the seller cannot have the right to repurchase the asset/shares/business in any way during the 3-year period. A deal made to during this period to defer the repurchase to year 4 would also render the scheme invalid.
  • No jobs must be lost unnecessarily as a result of the transaction.
  • No double-dipping: Where a seller has claimed benefits in terms of Statement 102 under its ownership scorecard it may not claim under the enterprise and supplier development element.

How are ownership points measured?

Importantly, Net Value points apply: the calculation of these points under Statement 102 must be based on (i) the total value of the transaction; (ii) the value of Equity Instruments held by Black people in the separately identifiable related business; and (ii) the carrying value of the Acquisition Debt of Black people in the separate identifiable related business. The measured entity must use a Standard Valuation method when calculating the aforesaid values.

i.e. if the black buyers of the business unit finance their purchase with debt, then the amount of remaining debt will affect the calculation of the ownership points.

The seller, when applying Statement 102, will need to comply with the sub-minimum requirement for ownership, being 40% of the Net Value points only to the extent of the transaction involving the separately identifiable related business and will only have to comply with all other priority elements as required by the Generic Codes.

What about voting rights?

Voting Rights and Economic Interest are calculated using the formula set out in Annexure 102(A); the seller can achieve equivalency percentages in its ownership scorecard as if those percentages arose from a sale of equity Instruments in the seller to black people.

Where calculating the ownership score, recognition of the value of the sale transaction occurs on the basis that:

  • The separately identifiable related business must form part of the same chain of ownership and be owned by the seller. i.e. you can’t sell black people a division that is unrelated to the seller/measured entity to start with.
  • The recognisable Economic Interest will be the percentage of the value of the separately identifiable related business to the total value of the seller.
  • The percentage of Exercisable Voting Rights held by the new owners of the separately identifiable related business represents the recognisable right to Exercisable Voting Rights held by Black people. This is easy for 100% black owned buyers, but far more complex to determine where the BEE owners voting rights are not straightforward to determine (.e.g. share classes or other arangements).
  • The rights of ownership granted to Black people in the separately identifiable related business are comparable to rights that would have accrued had the sale/transaction taken place at seller level.

The final ownership score takes three years to measure:

One of the biggest risks in S102 transactions is that the final ownership score achieved takes three years to determine – as this is based on how the relative fortunes of the original measured entity and the spin-off business compare three years into the future.

For the first three years after the transaction, the seller will recognise the ownership points on the date of measurement in accordance with the (i) value of the seller and (ii) the value of the separately identifiable related business. On each measurement date after the third year, the seller can recognise ownership points based on the ownership indicator percentages achieved in the third year after the transaction.

While the transaction value is required to be reviewed by an independent expert, who is required to provide an opinion on the fairness of the transaction value. Continued recognition is subject to the opinion of the independent expert supporting the transaction value.

One of the most beneficial aspects for a seller in concluding a Statement 102 sale transaction is that it radically reduces the seller’s Net Value points requirement, an element that is a priority element and can result in the entity being discounted by a BBBEE status level if it fails to meet the 40% sub-minimum level of compliance.

Areas of confusion:

  • Not all asset sales qualify: the sale of an asset that isn’t an independent business would seldom qualify for recognition under this statement, which requires that the transfer of a viable, sustainable business, plus productive capacity and specialized skills. So, you can sell off a building, equipment, etc. but it will only receive recognition if all the qualifying criteria are met.
  • Calculation of Net Value, economic interest and voting rights: these have been described as “an interpretative lottery”. The formula included as a schedule to Statement 102 only applies to the calculation of economic interest and voting rights and not Net Value points, which requires another calculation method. This offers opportunity but also carries risk. Please ensure that any Statement 102 deal you are considering is carefully checked by your verification agent before you commit to it.
  • Cross-ownership: what happens if the measured enity sells an asset to a ‘black company’ in which the measured entity is also a shareholder’? Here, the requirement for a “separately identifiable related business” has also led to confusion regarding the nature of the purchaser; particularly whether it must be unrelated to the seller and whether it must be at least 51% black-owned. Compounding that, the advice on the B-BBEE Commssion’s website seems to conflict with the position stated in the codes: the answer to the question “Can a measured entity recognize points for assets sold to a company it has shares in, for the purpose of Statement 102?” is “Points can be recognized where assets are sold to a company in which the seller has no relationship with the purchaser, which means it has to be a separately identifiable business”.

What’s the Tusker position on Statement 102 deals?

Complexity is nothing new to BEE deals, but Statement 102 deals are especially complex with many criteria to be met, different measurements for net value, voting rights and economic interest, and confusion as to whether the selling business can have any interest in the buying business. Each of these items is a possible obstacle, and every single deal will by nature be bespoke – pushing up legal costs etc.

But the main thing that concerns us is that one won’t have any certainty about the actual ownership score achieved until three years after the deal – this is because it’s only the relative valuation of the seller and spin-off at that time that determines the points achieved. We commonly hear that businesses are suffering because they’re not black owned, and our clients use this to justifiably reduce their valuations pre-deal. But say one sells a division worth 51% of the original measured entity’s value to black people: the measured entity being deemed 51% black owned should grow faster and be far more competitive. If this is the case, then by the end of year three the measured entity’s value is likely to have grown much faster than the value of the spin off business. Just a 0.1% difference in growth rates over 3 years is enough to screw up your deal! When revalued, the ownership would then be diluted to less than 51% envisaged – not the desired outcome. This risk is really hard to protect against while meeting all the other criteria.

What’s the why?

Moreover, there is one other point that we very rarely see discussed: what’s the strategic rationale for selling off a business unit in the first place? Although we conclude this article with this point, if you’re considering this approach to ownership then the first question should be ‘why’ the deal makes strategic sense. So many of the deals we’ve seen fail at this first hurdle. However, perhaps there is a division that no longer makes strategic sense – an adjacency to exit, or perhaps something lower growth or capital intensive (i.e. a ‘dog’) that can be dumped. But then watch out for relative valuations at the end of year three. Either way, the strategic rationale must be interrogated and understood before a Statement 102 transaction is considered- there is no point selling off the crown-jewels to achieve BEE, and there are other, far less risky or complex ways to achieve the same result.

Talk to us.

Why now is the best time to do a BEE deal

The business environment isn’t pretty: South African economic growth is flat or negative, the political climate is turbulent, the fat cats of state capture still live the high-life, and a ratings agency downgrade looms.

It may seem all doom and gloom, but there is an upside. A real, significant upside that favours the stayers, the optimists, the pragmatists and those who desire success…

Ready for it?

It’s the best time ever to do a BEE ownership deal.


Because the valuation of your business is down. Which means that a BEE ownership transaction is easier to finance. Ergo, a deal is easier to do, and you can be quickly on your way to getting the 51% ownership ‘hunting license’ that’s a clear competitive advantage.

Now, there are many ways to do ownership deals and in most of them if you sell shares at a lower value now then the BEE partners will get a lot more upside (arguably at your expense). But there are ways to structure deals where the low valuations now can work very much in your favour.

The Tusker approach to doing BEE ownership does just this. The details are obviously confidential (it’s our, and ultimately your competitive advantage) but let’s just say that we actually feel sorry for those that did BEE deals when the economy looked great and before we realised the mess of state capture and corruption…

Those earlier deals often used broad-based schemes (regularly attacked by the BEE commission), modified flow through (which offered something-for-nothing back then but is now a significant disadvantage), and in most of them the BEE partners have debt in the deal – debt that is under-water compared to the current value of the business and thus really hits hard on the net value calculations of the economic interest score.

i.e. doing a BEE ownership deal now can let you leapfrog the early movers. It can set you up for years of growth, letting you take market share from non-BEE competitors, or even from those who have done deals previously that have all the prior disadvantages.

For those committed to building their business in South Africa we have a special BEE deal for you: a deal that achieves legitimate empowerment and builds a better ecosystem around your business. A deal that our clients chose over other approaches every single time.

Ready to grow? There has been no better time.

Let’s chat.

Learn how to use BEE as a strategic advantage:

Want to learn how to make BEE into a strategic advantage?

You’re not alone: we’ve been asked many times if we’d share our experience in finance and BEE to help business owners and their advisors better understand how to make BEE into a strategic advantage.

So we’re planning a series of 1-day workshops in the major cities of SA, for Oct/Nov this year.

It will be a super experience-transfer workshop, where we’ll really unpack things for you.

You’ll learn:

  • Why BEE exists and why it’s not going away anytime soon
  • How the low-growth economy increases the importance of BEE
  • What the different scorecard elements really cost, vs the returns you can expect.
  • The advantages of an ownership-first BEE strategy
  • How to survey your customers and understand the ROI from BEE
  • Why buying/selling shares in private companies is tricky, and why BEE makes this harder still.
  • Common issues in BEE deals, including financing, tax and control…frustrations and fronting
  • What the ideal BEE looks like
  • The different ownership types allowed in the codes
  • The pros and cons of common ownership structures
  • How to finance BEE deals
  • How tax trips up many deals, sometimes years down the line.
  • How to get out of a BEE deal
  • Dealing with the BEE commission: what to expect.
  • Verification: common pitfalls & how to prepare
  • Sector specific issues
    …and much more.

If you’d be interested in this, simply email us and we’ll stay in touch. More formal communications to follow…

New BEE rules make 51% flow-through ownership even more important:

Early last year the DTI put out several proposed changes to the BEE Act for public comment. We submitted our comments/concerns within the dates and subsequently met with the DTI to discuss them. Others did the same.

Speculation as to which changes would come and which of the proposals would be discarded has ended: on 9 April 2019 Minister Davies signed four amendments to the B-BBEE codes that were gazetted on 31 May 2019 and come into effect on 30 November 2019. These amendments affect code 000 (general principles), code 300 (skills development), code 400 (Enterprise and supplier development, including preferential procurement), and changes to some definitions in section 1 of the codes.

Aside from a large list of proposed changes that didn’t make it into law, what’s significant is the timing of these changes: while they are the last amendments the outgoing DTI Minister Rob Davies would sign off on BEE; they could easily have been stopped by the new government if they saw fit but instead they were gazetted. In some ways, this is policy stability – it certainly sets a clear direction for the foreseeable future.

Since Tusker is BEE-ownership focused, this article discusses impact of the changes in the codes from an ownership perspective. There are some far-reaching and important changes, which support our earlier prediction that ownership will become more important and that the nature of the ownership (flow through) is also increasingly emphasised. The bottom line is that 51% flow-through ownership is more important than ever, for you and your big corporate customers.

Here are some of the specific changes:

Amendments to Schedule 1 (interpretation and definitions):

“Designated Group Supplier”, has been introduced. This is a supplier who is not only 51% Black owned but these owners are also unemployed black people, black youth, black people with disabilities; black people living in rural and underdeveloped areas and/or black military veterans. This term was not previously defined. This provides clarity on how to earn the 2 points on the preferential procurement scorecard for procurement from a “Designated Group Supplier”.

Net value calculations get clarification through the definition of “Current Equity Interest Date”. This helps provide some clarification around calculations involving the ‘time-based graduation factor’ which is often used in vendor-financed structures.

Amendments to Amended Codes Series 000: General Principles

The ‘automatic’ level 2 status for 51% black-owned EMEs or QSEs is only available if they’re 51%-99% owned on a flow-through basis. Similarly, 100% flow-through ownership gets to an ‘automatic’ level 1. Only an affidavit is required for companies this size. The most NB point here is that modified flow through (MFT) structures cannot achieve Automatic level 1 or 2 – they will instead have to go through a full audit on the QSE codes, adding a significant hassle factor (and the costs of a full BEE audit) to the use of MFT.

Tusker commentary: the recognition of ownership via the modified flow through principle is forcibly being squeezed out (as predicted). We’d suggest any business change to a direct (i.e. flow-through) 51% ownership. Contact us to learn how to do this at the highest possible ROI.

Amendments to Amended Code Series 400: Enterprise and Supplier Development (including Preferential Procurement)

Procurement is the way that BEE codes trickle down through the economy, and here the ‘big companies’ now have a target to procure 50% of total procurement (up from 40%) from 51% black-owned companies, AND the points awarded for this go from 9 to 11 AND spend on 51% black owned companies as measured on the flow-through principle can be multiplied by a factor of 1.2 i.e. the target and the available scorecard points and procurement recognition have shifted – again placing increased emphasis on 51% black-owned businesses as measured on a flow-through basis.

Another very NB change is that large entities (i.e. those in the Generic threshold) can also be included as beneficiaries of enterprise development or supplier development initiatives as long as they are 51% black owned on a flow-through basis and provided that when the entity first received assistance from the measured entity, the Beneficiary was an EME or QSE. Recognition for assistance to 51% Black owned large entities will be limited to five years from the time when the beneficiary first received assistance from the measured entity. This change is designed to not penalise either the QSE who becomes Generic because it wins business from a large customer, or the large customer who buys from the QSE that then becomes Generic. i.e. it provides a much-needed smoothing of the BEE effects as businesses grow from QSE to Generic. Again, modified flow through structures clearly do not meet the grade.

The amendments also make it clear that a supplier development beneficiary is a part of the Measured Entity’s supply chain, whereas an enterprise development beneficiary is not. This is a simple and clear test for companies and verification agencies alike. Contact us to learn how our ownership solutions can accommodate either in an optimal way.

Guarantees receive a far higher status too: whereas previously only 3% of the amount of any guarantee provided could be recognised as supplier or enterprise development contributions, this is now 50%. The idea is that companies can provide guarantees rather than spend money, but this of course will need to be balanced by far more reliable credit-worthiness and financial diligence by the parties providing the guarantee. It may also affect liquidity/solvency requirements. While it sounds attractive it may significantly change risk exposure.

What was left out?

While the emphasis on 51%+ flow-through black ownership is expected, last years’ proposed amendments included a lot of other tweaks. It’s beyond the scope of this article to revisit all of them, but as an illustration of the process/thinking involved here are three examples:

  • Proposed: that 51% flow through black owned businesses could get an automatic level 2 even in the generic category. Many argued against this, with the logic that all big companies should be measured against all of the scorecard elements. Net result: companies that are QSE/EMEs and grow into generic get a period (5 years) of continued recognition on their customers ESD scorecards, but still have to do all the BEE scorecards on their own business.
  • Proposed: restrictions into how flow-through ownership could be achieved. For example, a proposal that could have affected us was that private-equity ownership would not count as flow-through ownership if a company moved from QSE into Generic. (The same was proposed for broad-based trusts and some other common structures). We argued that this made no sense as private-equity by nature targets high growth companies that would be expected to grow from QSE to generic very quickly. Thankfully, the changes place an increasing emphasis on 51% flow-through black ownership without being increasingly restrictive as to how that is achieved. We think this is sensible.
  • There were no changes to the turnover amounts relative to the scorecard levels. E.g. QSEs are businesses with turnover higher than R10M and lower than R50M. EMEs are lower than R10M and Generic above R50M. This hasn’t changed. Many people expected these brackets to be moved upwards, but the DTI has learned a lesson from SARS and will let BEE requirements become increasingly stringent for more companies as inflationary growth pushes them into higher brackets.

What are the summary implications?

51% flow-through black ownership is the trump card – the new regulations place increasing emphasis on this, from the ‘automatic level 2’ available to EME/QSEs, to the continued recognition of them as they grow through the generic level, to the points available on ESD scorecards, and the enhanced recognition of procurement spend for 51% flow-through black owned companies. There really is no other choice.

Please contact us to learn how Tusker can help you achieve 51% flow-through black ownership in a way that keeps you in operational control and increases the value of your investment in your business.

How to get out of a BEE deal

Relationships end with death or divorce. Legal fees and taxes are certain:

Many relationships sour, once the excitement of the courting is over and the realization of the limitations of the partnership sets in.  Sometimes this turns ugly (or the partner does?) and ends in litigation, often highly emotionally charged and sometimes just plain vengeant.  A solid pre-nup can mitigate the damage and set out the rules, but even so the process of divorce often leaves both parties feeling cheated.  Legal and other advice means that neither side really wins, and the pie that remains to be shared is smaller than the pie before the divorce. The destruction of value is worth the ability to chart a course independently of the other party going forward.

Even when the other party is not even contesting the separation, divorces are never simple.  This applies to dissolving a marriage, a customs union or a commercial arrangement.  Look at the Bezos divorce, Brexit or the Growthpoint BEE dispute as examples.

BEE contracts, like any commercial union, often go the same way:

The reasons for a BEE relationship no longer working are the same as in a marriage – a party disappears; the enthusiasm goes; better prospects beckon; expectations are not being met or consummated; trust breaks down; or it is simply a waste of time.  This happens even when there isn’t a guilty party.  Sometimes it’s not working.

Undoing a BEE deal is very different to a divorce:

We’ve recently seen a number of cases where the aggrieved party in a BEE deal decides to get rid of the annoying partners, mistakenly thinking that the decision to do so is all that is necessary. Not so much.

There is one huge difference between a matrimonial relationship and a shareholder relationship: if one party wants a marriage to end, the other can’t save it.  The mere fact that someone wants to leave a marriage is evidence that the marriage has irretrievably broken down – a recognized ground for divorce.  So, staying married is as much of a choice as marrying.  Married people chose to stay married, even if its unhappily ever after.

In shareholding relationships there is often no such choice, especially when the shareholders don’t agree.  The unhappy partner in the BEE arrangement cannot simply chant “Go Away” three times or hope on a wing and a prayer that the other side will just slip into the sunset.

Firstly, for the BEE ownership points to be claimed the Black Person has to be the shareholder in the register (yes, this discussion ignores options and the BEE rules around them).  There may be contracts between the parties, but no matter what, a shareholder gets rights from a company’s Memorandum of Incorporation, Company Rules and the Companies Act.  Some of these rights, especially those in the Act cannot be taken away.

So, to be clear, if a shareholder hasn’t paid a seller for some shares, the seller may sue for payment, but he cannot simply take the shares back.  The registered shareholder is entitled to some rights and can claim these from the company, directors and other shareholders just because he is a shareholder.  It does not matter how one seduced and enticed one’s spouse into marriage, the spouse has special legal status just because they are the spouse!

How to get out of a BEE ownership deal:

In undoing any shareholder relationship, the basic objective must be to get the shareholder’s name out of the register.  This must follow the correct process or it will simply be put back (and other claims may still follow in respect of, say, lost dividends or legal fees).  It’s important to seek advice to ensure that this is done properly.

Simply put, the exiting shareholder needs to be part of the process and will be paid to leave in one of the following ways:

  1. Willing seller: If the BEExiter agrees to sell his shares, buy them.  The shares could be bought by the other shareholders, by a third party or even by the company itself (subject to additional Companies Act requirements).  In any case the buyer and seller must agree the price.  The fact is that there is a logical price at which a rational seller will say that it is a good deal and take his money and run.  This price may be one that the seller has named, or it may be one that the buyer made too good to turn down.  The seller may sell because the shareholder divorce is destroying value and it is better to jump ship and salvage what one can.  This price exists.  The challenge is that if the emotions have gotten too hot, if the expectations are too far from reality, then all it takes is for one party to act unreasonably or irrationally and then “expropriation with compensation” will fail. This is too often the case – both sides need to engage with independent advisors early in any process that’s likely to be acrimonious (and removing a shareholder quickly gets that way).

Either way, the exiting shareholder needs to agree to this and needs to be paid.

  1. Forced sales: A properly written shareholders’ agreement/company rules or MOI sets out what happens in the event of a forced sale. If one has secured agreement in advance that one party can buyout shareholders on the occurrence of some event then one can force the sale.  But, there are two requirements: (i) there should be this advance agreement (normally included in shareholders’ agreement) and (ii) the event must have happened.  The type of events that could trigger a forced sale include certain misconduct (such as prohibited competition, or solicitation of clients or staff) or a change in circumstances (such as liquidation).  Importantly this could be the majority shareholder too who is forced to sell.  As this is a contractual provision it may be that the forced seller simply does not exit on the agreed terms, and one has to enforce a contract (while he remains a shareholder).  This is addressed by making the company a party to the shareholders’ agreement too so that it can be compelled to register a forced sale.

The exiting shareholder needs to pre-agree to this and needs to be paid.

  1. Optional sales: A sale can also be forced by giving someone an option to buy the shares at some time in the future at a pre-determined price.  This is a call option and if a party who has such an option calls on the shares and pays the agreed price, then the selling shareholder has to deliver the shares.  Unlike a forced sale, the option holder does not have to buy the shares, but should he elect to, then the shareholder has to sell the shares.

The exiting shareholder needs to pre-agree to this and needs to be paid.

  1. Donations: The BEExiter cannot simply resign as a shareholder, as say an employee could.  Even if he ceases to exist (because he dies or is sequestrated), his shares just pass to his successor in title (his executor, heirs or liquidator).  However, if a shareholder is not interested in conveniently dying (and the other remedies mentioned here are not available) then he can only cease to be a shareholder if he gives them away.  Donors are liable for donations tax, so even in this scenario the exiting shareholder does have cash flow consequences, albeit negative ones.

The exiting shareholder needs to agree to this and needs to pay.

  1. Other forced sales: The Companies Act does give aggrieved shareholders certain rights to address being wronged and they can approach the Companies Tribunal or the Courts to seek redress.  The most important rights are the so-called appraisal rights in section 164 which can force a company to buy out a shareholder at fair value in certain circumstances.  It doesn’t matter if neither the seller or the company agree to the value.  They have to, however this is obviously a long process and can be very expensive in terms of legal fees etc.

The exiting shareholder agrees to this (as he initiates the process) and needs to be paid.

What about trying to make it work?

As we’ve shown above, one party cannot simply remove another because they don’t like them.  Parties need to negotiate their coexistence and how they will exit from the relationship. Obviously, this is better done long before things fall apart.

Sometimes working on the relationship will yield the best results and this often starts with listening to and talking with one another.  We are no counsellors but why doesn’t the existing relationship work?

  • Are the intentions of the parties honourable at the outset? Do parties trust each other?
  • Are expectations and deal-terms reasonable and fair? Often in BEE transactions there’s unreasonable expectations for super returns – expecting business to flow just because of shareholding (yet without anything untoward) or for dividends simply to flow despite no real value added. Many entrepreneurs want a business partner – someone to get stuck in and run the business – rather than just a shareholder and when they get the latter face real disappointment.
  • Are the expectations of the after-life just a fantasy or is it better to stay where you are (not only because you committed to, but because you actually want to)?
  • What’s the vision? Can the parties still offer each other the promise of a future together?
  • Should stay in this less than perfect arrangement because the alternative is too costly to contemplate and isn’t great for future generations?

The Tusker approach:

As highly experienced experts in BEE and other shareholder transactions, we’ve taken extensive care to make sure that our agreements include very clear clauses that determine the rights of parties and the process to be followed in a potential divorce. These are standard in every deal we do and are agreed up front. The most NB thing however, is the setting of expectations as to what happens after we invest in a business, as its against these expectations that reality is always measured. Both parties are far more likely to be happy if people do what they say they’re going to do.

How the NCA sinks vendor-financed deals

This may be one of the more NB articles we’ve written. No kidding. The most common method used to finance BEE might just become spectacularly unstuck thanks to the NCA (National Credit Act) and a whole bunch of money owed to ‘white’ sellers of shares may be unenforceable. Read on, and expect a flurry of legal activity. 

Understanding Vendor finance:

Vendor finance is, very simply, the financing of the buyer by the seller.

You want a BEE partner but they don’t have money (usually the case), so you sell them the shares in the business but lend them the money (i.e. you become a credit provider) to buy the shares. They repay this debt and the interest thereon through dividends over time. You get your money and the BEE points you need; they get the shares and the economic value. As a credit provider, the credit risk is yours but once the shares (or portions thereof) have been transferred they belong to the new (presumably BEE) owners.

Almost half of BEE deals involved Vendor financing: the B-BBEE Commission reported that 39% of all BEE ownership transactions were vendor-financed and that a further 5% involved some combination of funding which included vendor financing.

A real world example: 

To fully understand vendor finance let’s look at what it is with a simple example (in this case, unrelated to BEE but the same principles apply):

Mr. Du Bruyn set up a business in 1984 sealing industrial leaks.  He and his wife knew a young man, Mr. Karsten, who they treated as their son.  Karsten was a law graduate, a university lecturer and a municipal councilor and the Du Bruyns involved him in the business in the early 2000s. They mentored him so that, by 2008, he was the technical director and he became a shareholder.

Eventually, in 2012, they agreed to part ways (the best way to get rid of a shareholder, as we discussed previously, is to buy them out) and they agreed that Karsten would buy out the Du Bruyns for R2.5 million.  They gave Karsten until 31 March 2013 to find the money.  When he couldn’t, they very kindly gave him another six months and when the finance still couldn’t be found, the Du Bruyns offered to buy Karsten out instead – for R1.5 million cash.

Karsten wanted R2 million which the elderly couple didn’t have, so the vendor (Mr. Karsten) agreed to vendor finance – the Du Bruyns would buy Karsten’s shares for R2 million with R500 000 to be paid in cash and the balance payable over five years with interest.

So far so good. The vendor gets the price he wants but to do this has to finance the buyer. Fairly typical. The difference is what happens when the buyer can’t come up with the money.

Enter the Supreme Court:

These (above) are the facts of a recent Supreme Court of Appeal court case Du Bruyn NO and Others v Karsten.

What went wrong: the business started underperforming and the Du Bruyns tried what they could to help it, even selling some personal assets.  Ultimately it made no difference and in the end they stopped paying Karsten and he started legal proceedings to recover the R1.1 million that they still owed him.

However, the Du Bruyns argued that they did not have to pay Karsten back in terms of their loan agreement and the highest court in the land agreed with them.  The court said that the loan agreement was void and unenforceable, which means that all its terms like interest rate, security and the like were not worth the paper they were written on.

The long arms of the National Credit Act:

The court reached its conclusion based on the National Credit Act 34 of 2005 which basically says that a lender needs to be licensed in terms of this Act to be able to enforce a loan agreement.

What is more, the vendor needs to have the licence at the time he makes the loan and it does not matter if he gets it later.  The court said that section 40 was clear and that if one makes any loan (even if it’s a once off or even if one is not in the business of making loans) then one needs a licence.

Implications for vendor-financed deals:

Before 2016 the lender had to be owed over R500 000 on his loans before falling under the NCA, since then the law states that a licence is needed for any loan is where there is an amount in excess of R0.01 that has to be repaid. i.e. every loan is now regulated.

In any vendor-financed situation where the buyer cannot come up with the cash – either because he doesn’t have it, can’t get it, or simply doesn’t want to pay – this is a very important judgment.

Yes, if I owe you any amount and you do not have a licence, you can forget about trying to enforce our loan agreement in any court – until parliament changes that section.  This won’t change fast – we do not have a sitting parliament at the moment (April 2019) and since a parliament seldom changes a law quickly and even less frequently backdates a law, we can expect a few years for this problem to be resolved.

Until then the BEE shareholders to whom you extended the credit to buy shares simply don’t have to worry about the contract, and the shares issued so far are theirs to keep.

Get legal advice:

Some of the reported B-BBEE ownership structures may have been vendor financed by licensed credit providers but there are (per the National Credit Regulator’s latest 2017/8 Report) only 6 191 credit providers. Chances are most of the vendors are at risk here.

All other vendor financiers should seek legal opinion on how they will get their money.

Their lawyers will no doubt point them to rules of unjust enrichment, but whatever without a valid contract no lender will get any interest, will not have their loan secured and can’t withhold instalments from dividends or remuneration.

There may have been far more economic empowerment in these deals than anyone realised…