Foreign-owned companies and BEE

By Ezra Davids and Ashleigh Hale, Bowman Gilfillan Attorneys

There is no legal requirement that multinationals or foreign-owned companies doing business in South Africa must transfer ownership of equity or assets to Black Economic Empowerment (BEE) groups. That said, our BEE legislation and regulations have a cascading effect that makes it a commercial imperative for most companies to transfer equity and/or assets to BEE groups. In other words, because state-owned entities and government departments are legally obliged to apply BEE legislation in evaluating tenders or in granting licences, permits or concessions, those firms that rely on government business become obliged to comply with BEE requirements. These same firms then demand that their suppliers become BEE compliant so that they can meet their own BEE targets, and so on.

The ownership and control BEE targets are generally the most difficult for foreign-owned companies to achieve. Many such companies have global policies in place restricting the level of ownership and control that can be transferred to local minority shareholders. In addition, the local structure of foreign-owned companies often makes it more difficult to transfer equity to BEE groups in a way that most local companies are able to. For example, a black investor cannot hold shares in a local branch office of a foreign-owned company without first obtaining exchange control approval, which may be difficult and time consuming to obtain. Further, the application of global transfer-pricing policies by some foreign-held companies often affects the level of profits of the local operation that are available for distribution by way of dividend. This makes the funding of any BEE transaction utilising dividend flow difficult to apply.

These difficulties have been recognised and provided for in some of the BEE charters, as well as more recently in the draft Codes of Good Practice for Broad Based BEE (“the Codes”), which state-owned entities and government departments will be legally obliged to apply.

The Financial Services BEE Charter, currently applicable to financial and insurance institutions, provides for an exemption from the BEE ownership and control targets set out in the Charter in certain circumstances. In order to be exempt from the ownership and control targets, a foreign-owned financial institution would have to show that it has in place a global policy that precludes it from accommodating local ownership participation and representation on its board.

In the information, communications and telecoms (ICT) sector, it is proposed that foreign owned ICT firms would be entitled to apply for an exemption from the equity targets set out in the draft Charter if it can be shown by the company in question that compliance would cause inherent commercial harm to its business due to legal, technological policy barriers that are incompatible with the sale of equity in the ordinary course of events. In the case of any other impediments, the company concerned would have to propose alternative equity models in a genuine effort to overcome the barriers in question and fulfil the transformational purpose of equity ownership.

The latest draft of the Codes published in December 2005 also contemplates an exemption from the BEE equity-ownership requirements. This exemption would apply to multinationals for as long as there is a global policy or regulatory requirement in place that restricts the sale of equity or assets by the multinational concerned and the multinational would suffer substantial commercial harm if it were to sell equity or assets to a BEE group.

The Codes require that the exempt multinational would then have to make an ‘equity equivalent’ contribution, which would include involvement in any public programme or scheme of a government department that has been approved as entitling a multinational to equivalent points under the ownership scorecard. There is no clarity at this stage as to what would qualify as approved public programmes or schemes, although it is likely that these would relate to the government’s broader economic goals, such as halving unemployment by 2014.

Equity-ownership exemptions do not apply in the mining sector. This is probably because the Mining Charter was one of the first BEE charters to be adopted and its provisions have been incorporated by reference into our new mining legislation. When deciding whether or not to award mining or prospecting licences, the Department of Minerals and Energy is now obliged to assess the BEE status of the applicant (local or foreign) in accordance with the targets set out in the Mining Charter.

Notwithstanding the exemptions applicable to foreign-owned companies described above, many such companies have chosen for various reasons to comply with the ownership targets set out in the relevant BEE Charters. Recent examples that come to mind include the sale of 25 per cent of equity in the South African subsidiaries of Deutsche Bank and up to 15 per cent by Merrill Lynch to various BEE groups, and in the ICT sector, the sale of 30 per cent of the equity of Unisys South Africa to a broad-based BEE group. The decision to sell a portion of the equity in a local operation will of course depend on the specific strategic and commercial requirements of the company in question.

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