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:
- 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.
- 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.
- 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.
- 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.
- 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.