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BEE – Watch Your Language

Minority protection wording in a BEE merger could cost you.

Juliet Pitman

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Waste Basket with Papers

Many businesses just don’t have access to regular legal advice because the costs are prohibitive. It is therefore left up to business owners to make sense of legislation pertaining to them.

However, complex wording makes it impossible for a layperson to foresee all the potential ramifications of legal acts. One key example is the Competition Commission’s wording regarding mergers, particularly relevant in the current climate of small business mergers with BEE companies.

In theory, the Competition Commission is actually a good thing, allowing small and medium-sized businesses an equal opportunity to participate in the economy. Its mandate is as follows:

  • To promote the efficiency, adaptability and development of the economy
  • To provide consumers with competitive prices and product choices
  • To promote employment and advance the social and economic welfare of South Africa
  • To expand opportunities for South African participation in world markets and recognise the role of foreign competition
  • To ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy
  • To promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged people

It also “regulates restrictive practices, mergers and the abuse of dominance”. So an organisation with 45% or more market share is required to conduct its business according to strict rules. This is to prevent dominant players from exerting market power to the exclusion of smaller competitors. If smaller competitors were pushed out of the market, the dominant company could drive prices up. Because the Competition Commission is concerned with the welfare of the consumer, it aims to ensure that markets remain competitive.

However, when it comes to mergers, businesses are going to have to pay close attention to the wording of the Competition Act and to what is known as “minority protection wordings” in their merger agreements with BEE companies. This is because the Competition Commission needs to be notified of certain mergers, which can be a costly process. Many companies incorrectly believe that their mergers do not fall into this group. The key lies in how the minority protection rights are worded in the merger contract.

To determine whether you need to notify the Competition Commission of a transaction, you must know if the transaction constitutes a merger. The Act states that a merger “occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm.”

The Competition Commission must also be notified of all mergers and acquisitions that meet a certain financial threshold: “if the combined annual turnover or combined assets of the acquiring firm is more than R200 million, and the target firm is more than R30 million.”

For smaller companies that do not meet the financial threshold, the first provision is the most relevant. The key word is “control” – does the merger allow for one firm to acquire direct or indirect control over the other? As most BEE deals give the BEE company a 25%to 26% equity stake, and people assume that “control” means they must have an equity stake of 51% or more, the majority of business owners believe that their mergers are not notifiable.

Kevin Homann, a founder-director of Spirit Capital, a corporate and structured finance company, explains: “Entrepreneurs with little experience of competition law assume that 51% equals control. But many precedents indicate that commissioners will apply a less simplistic definition. Much smaller stakes have attracted their attention.”

He goes on to add, “The key is the strategic influence exercised by the equity stakeholders, including a new BEE partner with ownership of perhaps a quarter of the business.”

What’s important here is how the Competition Act defines control. A person controls a firm if that person:-

  1. beneficially owns more than one half of the issued share capital of the firm
  2. is entitled to vote a majority of the votes that may be cast at a general meeting of the firm, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that person
  3. is able to appoint or to veto the appointment of a majority of the directors of the firm
  4. is a holding company, and the firm is a subsidiary of that company as contemplated in section 1(3)(a) of the Companies Act, 1973
  5. in the case of a firm that is a trust, has the ability to control the majority of the votes of trustees, to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust
  6. in the case of a close corporation, owns the majority of members’ interest or controls directly or has the right to control the majority of members’ votes in the close corporation
  7. has the ability to materially influence the policy of the firm in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in paragraphs (a) to (f).

This last point is most relevant. To avoid allegations of tokenism and fronting, many BEE shareholders seek what is known as “minority protections” that give them a say in how the business is run, even though they don’t have a “controlling” 51% shareholding. Although there is not yet a set-in-stone interpretation of what the Commission means by the words “materially influence”, Spirit Capital has received legal opinion that “it is generally accepted that such powers and/or rights like having (a final) say on issues like budget, business plan, investments, appointment of senior management, direction of the commercial policy of a business and casting votes in the event of a tie in voting in members or board meetings would denote the existence of control“.

If the minority protection wordings in a contract can be interpreted as effective control, then the merger could be notifiable to the Competition Commission because it meets the criteria set out in point (g).

So what does this mean for your business? The answer is increased costs. As Homann warns, “The wording of these provisions could add up to R1 million to the cost of the deal.” The Competition Commission charges a hefty fee for notification of a merger. Where the combined annual turnover or assets are at or above R200 million, but below R3,5 million and the target firm’s assets are at or above R30 million but less than R100 million, a R75 000 fee is charged.  If the combined annual turnover or assets are at or above R3,5 billion and the target firm’s are at or above R100 million, the fee is R250 000.

Your business will also need to carry the cost of preparing and submitting supporting documentation for the merger. There’s also the time factor to consider. The approval process can take anything from 20 days to several months. The upshot is that you could become embroiled in a lengthy and costly operation far beyond what you ever imagined. To avoid the notification requirements, the transaction documentation for your merger, and in particular the minority protection wording, needs to be carefully planned and drafted, so you would do well to invest in the services of a competition law expert.

Juliet Pitman is a features writer at Entrepreneur Magazine.

BEE

It’s Do Or Die In BEE Compliance

What this means when doing business in South Africa.

Jacolien Botha

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More and more, we see businesses and BEE verification firms coming under the spotlight for fraud and non-compliance. BEE ratings are viewed as a ‘hot commodity’ and many BEE services firms have popped up over the past few years to accommodate the demand.

Pressure mounts on businesses to reassess their skills development spend, youth contributions, ownership and management structures in-line with the BEE scorecard, and the Government has been particularly verbal in highlighting the need for BEE compliance.

AJ Jordaan, Sales Manager for leading BEE-aligned Skills Development training company, LFP Training says that its more than compliance – it’s a way of life for businesses today. “Over time, businesses have realised that while they are doing almost everything right, what would make or break a deal could very well be their BEE rating,”

“Businesses receive additional points for doing business with BEE-compliant companies. Enterprise & Supplier Development is key to a firm’s business strategy. With legislation changing on a regular basis, we always advise that clients do it right from the get-go,”

Related: How Do I Become B-BBEE Compliant?

A scorecard is not a target – it should be incorporated into a business’s vision and growth strategy; it is just as important as any other top-line business matter these days. “With the need for more and more guidance in the realm of BEE, more suppliers have popped up to provide strategic counsel and it’s easy to get caught up in the ‘hype’. Terminology, weightings, paperwork and implementation are daunting tasks, but with so many businesses still failing their BEE audits – even under advisory – how do we know who to trust?

“Referrals by word of mouth are always great. I also believe that businesses must ask for a company’s success rate and previous customer testimonials. More than anything, the consultant/ BEE supplier that a company chooses must understand how to truly implement BEE strategies to achieve exactly what it’s there for – to empower the previously disadvantaged and help bridge gaps in society” says AJ.

With all the hype, we forget about what its there for. “Trading in points is not the intention; the end goal is economic transformation and fair opportunities for all,” he continues. “If a company fails its BEE audit, it’s essentially failed to promote exactly what BEE is all about. Money has been wasted and no transformation has really occurred. Partnering with a credible and knowledgeable partner is therefore key.”

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BEE

BBBEE Share Schemes – A Ticking Time Bomb?

At the forefront of these mechanisms are employee share schemes.

Nicolene Schoeman-Louw

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BBBEE Share Schemes

Since the promulgation of the amended codes of good practice under the Broad Based Black Economic Empowerment Act 53 of 2003, as amended (“BBBEE” or “the Act”), compliance with the ownership element has become a compulsory compliance element for both Qualifying Small Enterprises (“QSE” having between R10 and 50 million annual turnover) and generic enterprises (over R50 million annual turnover). As a result, businesses have found themselves considering mechanisms which aim to address this element. At the forefront of these mechanisms are employee share schemes.

The first of these structures were constructed in the early 2000’s by JSE listed companies. The aim of these structures were essentially two-fold:

  1. An employee retention strategy similarly constructed as executive share schemes in many ways, and
  2. Compliance with BBBEE.

These structures have recently been under the spotlight again . Mainly because of the questions it raises in terms of whether it is true empowerment or not.

Related: Corporate BBBEE Compliance Turned Into BBBEE Investment

For businesses wanting to utilise these structures, a number of aspects are to be considered:

  1. Employers and employees stand in a vertical relationship with one another. This is because the employer directs the expectations and the standards of the services exchanged between them. Shareholders, on the other hand, are in a horizontal relationship as they are equally entitled to regulate and direct matters which may affect their shareholding or investment. So, to shift from a vertical to a horizontal relationship requires the necessary professional inputs, management and attention.
  2. These share schemes are separate entities that require the necessary attention and inputs. As such, it is not just a case of setting it up and it simply running itself.
  3. These structures need to have a shelf life in my view. In this regard, I mean that a clear commercially feasible strategy needs to be devised and implemented in regards to the trust. This would include a structured plan whereby employees would not only be entitled to dividends but would also have the opportunity to up-skill and to improve themselves in various ways. The financial benefits should aim to facilitate direct ownership.

It is important to remember that inviting partners to sit at the table, needs to fully embrace the concept. If it does not, it not only negatively impacts the relationship, but disempowers the people involved. The human aspect thereof is as devastating as the legal non-compliance which may even go as far as constituting fronting.

Related: The 5 Elements Of BBBEE

In order to avoid this, these structures need to be setup correctly and managed correctly, which means:

  1. The trust deed must clearly define the beneficiaries and the proportion of their right to receive distributions;
  2. The trustees must actively take part in managing the trust at a level similar to the management role of shareholders in a company having a shareholding;
  3. Based on the aforesaid, in my view, the trustees should be appointed by the beneficiaries;
  4. A written record must be kept identifying the beneficiaries as well as prove that they fall within the designated groups as defined in the Act. The trustees must have no discretion in this regard;
  5. A written record must be kept of fixed percentages of claims or outlining formulas for calculating claims. The trustees must have no discretion in this regard;
  6. The trustees must present the financial reports of the trust to the beneficiaries yearly at an annual general meeting of the Trust;
  7. The trust deed or other relevant statutory documents of the trust must be made available, or on request, to any beneficiary in an official language in which that person is familiar;
  8. On winding up or termination of the trust, all accumulated interest must be transferred to the beneficiaries or to an entity representing the interests of the participants or class of beneficiaries.

Expert professional guidance is therefore crucial in order to avoid these structures becoming your own ticking time bomb.

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How Incubator Project National Gives Your Enterprise a One-Stop-B-BBEE Shop

Turn your B-BBEE compliance spend into investment spend in 2017.

The Investment House

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Vital Stats

B-BBEE does not have to be a one-sided redistribution of wealth and power. “There certainly is a way to turn your compliance spend into investment spend. This year we are giving corporates the one-time opportunity to be part of our unparalleled Project National,” says Jack Janse van Rensburg, director of The Investment House.

“Project National is a complex incubation model that provides a one-stop-solution to empower, develop and skill South African entrepreneurs.”

Related: How To Get Your B-BBEE Money Back

The Investment House’s incubator concept, Business Mastery Program, is designed for “strategic accelerated business serendipity,” according to Janse van Rensburg.

Project National is realised nationwide in multi-industrial hubs, which create a strategic accelerated business serendipity through establishing a complete supply chain, or ‘one-stop shop’ for the public, for large scale tenders and corporates.

The unique benefits for participating enterprises include:

  • Increased opportunities to be part of complex tenders and contracts
  • Immediate market access through internal hub usage of each other’s services and products
  • Increased marketing and sales opportunities through beneficial location strategy (at convenient, easily accessible and visible shopping malls/office parks)
  • The greater chance of interactions that give birth to new ideas and collaborations
  • Increased learning and development opportunities through small, medium and corporate business partnership (business skills transfer, mentoring, industry-specific training).

business-investment-advice

Investing wisely

Project National is an unparalleled incubator concept in South Africa that brings a wide array of business advantages and B-BBEE-ROI opportunities to corporates, who can choose to make either monetary or non-monetary contributions within their B-BBEE spend.

Related: To B-BBEE Or Not To B-BBEE

How your B-BBEE compliance spend turns into investment spend with Project National:

1Create a consistent supply chain

Through your involvement in Project National, your struggle with inconsistent and unreliable supply chains can be over. Project National provides you with suppliers who can supply on demand, in the right quantity, to the right quality and the right price. More control and insight into your supply chain creates better competitiveness for your business.

2Extend your sales arm into new markets

Project National entrepreneurs provide you with an extended and widened sales arm into various different markets and distribution chains through the development of entrepreneurs acting as resellers of your product.

3Diversify your product range

Buying and financing assets can be a difficult task, therefore it’s often not possible for companies to diversify their range. Project National’s black owned start-up enterprises are more likely to obtain funding for assets and equipment and can therefore be a great asset to you when becoming a supplier to your company, allowing you to diversify your product range by outsourcing production of new components.

Related: Sustainable Growth For Future Prosperity

4Allow for lower imports

It can be hard to compete with Chinese imports on a price and now even a quantity level. While the demand for low quantities and tailor-made products is high, it’s hardly profitable for many big corporates. Project National’s entrepreneurs leave the doors open for you as they are smaller and organisational overheads are lower; making it profitable to manufacture lower quantities.

Be part of The Investment House’s unique incubator concept and see your ROI on your B-BBEE spend flowing.

 

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