posted 13 Nov 2007 in Volume 10 Issue 6

Overview of Black Economic Empowerment in South Africa

By David Yuill, Ezra Davids and Paul Schroder, Bowman Gilfillan

In 1994 the South African government put in a place a regulatory framework aimed at ensuring the economic empowerment of previously disadvantaged black South Africans. As a result, black economic empowerment (or ‘BEE’) has become an important part of the South African landscape in recent years, and an important factor for any company wishing to do business in the South African environment to consider. BEE transactions have become an important driver in the South African mergers and acquisitions market.

The regulatory framework
The key legislation in terms of which BEE is regulated is the Broad Based Black Economic Empowerment Act, 1998 (‘the BEE Act’) and the Codes of Good Practice published in terms thereof (‘the Codes’).
The Codes set out certain targets in relation to seven different elements of BEE - black equity ownership; management; employment equity; enterprise development; preferential procurement; skills development; and corporate social investment - against which companies are measured. Companies are scored in terms of a scorecard set out in the Codes (‘the Scorecard’) on the extent to which they meet the specified targets.
In terms of the BEE Act, every organ of state and public entity in South Africa is legally bound to take into account and, as far as is reasonably possible, apply the Codes in, inter alia, determining criteria for the issuing of licences and developing a procurement policy for selecting their service providers. There is no legal obligation on private enterprises to comply with the Codes, but it is obviously important for those companies that wish to do business with government entities, or obtain licences or concessions from government, to ensure that they score as high as possible in terms of the Scorecard.
This then has a flow-on effect, as in order to score highly on the procurement element of the Scorecard, companies will need to ensure that as many of their service providers as possible also score highly on the Scorecard. They will therefore give preference to service providers who have good BEE credentials. Compliance with the Codes is therefore more a commercial imperative than a legal one.
The BEE Act also makes provision for the publication of sectoral charters to regulate the implementation of BEE in a particular sector. Such charters are required to impose targets that are in accordance with the Codes, although they can deviate from the targets set out in the Codes if good reason is shown for doing so.

The ownership element of BEE
Of the various different elements of BEE regulated in terms of the Codes, one of the key elements is that relating to black equity ownership. It is this element that has been the focus of the numerous BEE transactions which have taken place in South Africa in recent years.
The target proposed in the Codes for black equity ownership is 25 per cent plus one of the measured entity’s equity. Particular weight is given to the participation of black women, black new entrants (being black persons who have not substantially participated in other empowerment transactions) and employee and broad-based ownership schemes in the shareholding structure, the intention being to ensure that as that many people as possible benefit from the empowerment initiatives, rather than only a small elite. As a result, many empowerment transactions will incorporate an employee scheme or broad-based shareholding groups as part of the ownership structure.
In recent years, many of South Africa’s large corporates have disposed of a significant equity stake to black empowerment groupings. Empowerment transactions that have recently been announced include those for large listed companies such as Tongaat-Hulett and Sasol (the latter being the largest transaction to date, with an estimated value of R18bn).
One of the key challenges in BEE transactions has been the financing of empowerment transactions, given that many BEE investors often don’t have access to adequate financing, and the company itself is prohibited, in terms of South African law, from providing financial assistance for the purchase of its shares. As a result, a number of creative structures have developed in the context of BEE transactions to assist with the financing thereof. An amendment to the South African Companies Act is due to come into effect fairly shortly, however, which will allow companies to finance acquisitions of their shares, subject to the satisfaction of certain solvency and liquidity requirements. This should make the financing of BEE transactions considerably more straightforward.
The BEE equity ownership requirements have also proved challenging for many of the multinational entities doing business in South Africa. In recognition of the difficulties multinational companies operating in South Africa may face in disposing of an equity stake in their local operations, the Codes have provided for another two alternative means for multinational companies in South Africa to obtain recognition on the ownership portion of the Scorecard.
The first of these is through contributing to equity-equivalent programmes – being government-approved programmes which, inter alia, promote black enterprise creation or skills development. In lieu of disposing of an equity stake, multinationals can obtain recognition on the ownership portion of the Codes scorecard for contributions made to such programmes, although in order to qualify for such programmes a multinational first has to demonstrate it has a global policy or practice restricting the sale of equity in its regional operations.
The second alternative available to local multinationals that don’t wish to dispose of a stake in their South African operations is to arrange for the empowerment shareholder to acquire a stake in the offshore parent company, equivalent in value to a 25 per cent (or such other percentage as may be decided on) stake in the local subsidiary, with the empowerment shareholder also being granted voting and other shareholder-type rights in relation to the local subsidiary equivalent to those that would be held by a shareholder in the local subsidiary. A structure of this nature has been implemented by multinationals such as Merrill Lynch and Cisco.

The future
At present the Codes are due to remain in force until at least 2017 and BEE is likely to continue to play a significant role in the South African economy for the foreseeable future. It will undoubtedly remain an important consideration for any business operating in South Africa in the years to come.