Soria Hay, head of corporate finance at independent investment banking and advisory firm, Bravura, discusses the implications for B-BBEE ownership transactions following the revised Codes of Good Practice.
Revised B-BBEE Codes of Good Practice identifies ownership as a core objective
The requirement for black ownership has been identified as one of the three priority elements under the Revised Codes of Good Practice. The B-BBEE scorecard targets 25.1% black ownership and minimum compliance with the ownership element of at least 40% is compulsory. Failure to adhere to the ownership requirements will automatically downgrade the company by one level.
The black ownership requirement presents a dilemma for many companies that concluded significant B-BBEE ownership transactions in the last decade, which deals are now coming to fruition. Many of these deals were entered into at a substantial cost to the underlying companies and ensured significant value creation for the black shareholders. The black shareholders, assuming they are past the lock-in period, have the right like any other investor to realise their investment and do as they wish with their shares with the result that this could leave the underlying entity losing some or all of its black ownership.
The principle embedded in the codes is that a company must meet the black ownership requirements at all times. Therefore, companies will be required to re-empower themselves when their black-owned partners divest of their investments in order to continuously meet the requirements of the ownership element of the scorecard.
‘Once empowered always empowered’ principle
There is the ability for companies with a demonstrable track record over a sufficient period of time of creating value for black shareholders to benefit from continuing recognition in respect of this value, thereby supporting their scorecard points. However, the revised codes do not fully recognise the “once empowered, always empowered” principle, which is a simplified reference to permanent black empowerment status afforded to a white-owned company which has met the ownership requirements previously but whose black shareholders may have subsequently exited the B-BBEE deal for various reasons. If this principle is not applied, companies would continuously be required to initiate and finance new black ownership transactions in order to remain B-BBEE compliant.
There are convincing arguments on both sides of the debate. One argument is that the South African Constitution recognises the injustices of SA’s past, and the achievement of equality is one of the values and founding provisions of the constitution.
Given the fact that the South African economy still excludes the vast majority of its people from ownership of productive assets, the South African government wants to see a new wave of black economic empowerment transactions in order to achieve economic equality.
The counter-argument is that B-BBEE has seen real value transfer and has therefore met its key objective of redressing the past. According to an Intellidex survey reported in 2015, empowerment schemes for the period 2002 – 2015 resulted in an effective realisation for BEE parties of R317 billion net of debt and financing costs. Many are of the view that South Africa now needs a globally competitive legal, regulatory, fiscal, monetary and tax dispensation, in order to attract both local and foreign investment. International shareholders are expressing criticism of having incurred the cost of facilitating a B-BBEE ownership transaction, and then being expected to incur it over and over again.
Effect on specific industries
This dilemma has been brought to a head in the mining industry which is awaiting a High Court ruling for a determination on the “once empowered, always empowered” rule. The Department of Mineral Resources argues that the ownership element of the Mining Charter should be a continuous compliance requirement for the duration of the mining right, and the Chamber of Mines representing mining companies is of the view that black ownership is a once-off requirement. The High Court ruling may ultimately have an impact on the Revised B-BBEE Codes. The very public spat between Eskom and Exxaro about Exxaro’s BEE credentials falling from 50% plus to 30% may likewise be influenced by the outcome of the court case.
This debate is also relevant for other industries. The Revised Codes are more powerful in that they will override the sector charter scorecards. All charters have to be aligned with the Revised Codes over time.
For some industries, such as financial services and telecoms, the implications of this are large. It means a reopening of negotiations regarding ownership targets. In the previous round of BEE, both were allowed a special dispensation and had ownership targets of much less than 25%.
The financial services charter was allowed to have a lower ownership percentage than other sectors. The reasoning was that large financial institutions were the primary funders of BEE deals and carried the associated risk. Additionally, the sheer size of these companies would mean that a requirement of 25.1% ownership would far outstrip the numbers in any other sector. Banking stability and systemic risk were also factors that were considered in depth during the charter negotiations. Therefore, financial services companies were required to do 10% ownership deals.
Telecommunications companies also received special dispensation previously due to the size of the companies involved. MTN and Vodacom were asked to do deals to the value of R7.5 billion, which was agreed would be considered adequate for full ownership points. Both companies did share offerings to the black public, which will unwind at some point, further diluting ownership. The ICT Charter that took effect in November 2016, prescribes a 30% ownership target.
Because the stakes are high, certain key decision makers are opting to play a waiting game to see what the fallout is from the court ruling for the mining sector before committing to the expense of acquiring new BEE deals. However, B-BBEE is not going anywhere in the foreseeable future.
Government’s commitment to broad-based empowerment is supported by tighter regulatory requirements and monitoring by the newly established B-BBEE Commission.
Neither has a time limit been placed on B-BBEE. In order to remain compliant, companies across the board will be obliged to maximise ownership points on their scorecards. In light of this, the contention around “once empowered, always empowered” could be purely academic. More critical is for companies to invest time now in considering new approaches to ownership that successfully balance shareholder needs with the requirements of compliance, in the spirit of B-BBEE.