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 (info@tusker.co.za) 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.