How to Seal that BEE Deal
In South Africa, as in the rest of the world, business shareholders focus on annual returns and dividends. For companies in South Africa, being B-BBEE-compliant makes a significant difference when it comes to growth and success. When implemented well, BEE can support job creation, global competitiveness and economic growth. It can also reduce the burden on entrepreneurs and assist in creating a more skilled workforce.
The Broad-Based BEE Codes of Good Practice are legally binding on all State and State-owned entities, so when it comes to choosing suppliers, granting licences or making concessions, all government (and an increasing number of public) businesses require their suppliers to be B-BBEE compliant.
Israel Noko, CEO of NPI Governance Consulting says, “Being B-BBEE compliant has knock-on effects. For example, businesses with high B-BBEE ratings may be preferred suppliers because their score helps to improve the score of the companies making use of their services.”
The amended B-BBEE Codes will see companies that lack Black shareholders dropping down by one BEE level. Noko warns, “The reality is that many companies that failed to meet the 25%+1 Black ownership target and are ranked as Level 1 BEE contributors will find it impossible to rise above a Level 6.”
Savvy entrepreneurs on the look-out for something that provides them with a degree of differentiation are aware that getting B-BBEE right can give their business a competitive edge. But, says Noko, it’s vital to get the fundamentals right:
- Black shareholders must have both voting and economic rights (i.e. receive dividends from the business).
- Avoid passive shareholders (B-BBEE verification agencies may see this as fronting). Opt for partners who are willing to operate in the business (Board participation secures additional BEE points).
- Clearly define roles in the business. Directors have fiduciary duties and any new BEE partner must be prepared to take on those responsibilities.
- Find partners you like to work with – don’t allow yourself to be bullied into a deal.
- The BEE partner is expected to pay for the true value of their shares. Bear in mind that allowing someone to take on a large debt without them having the means to repay it is against the National Credit Act.
- Draw up a shareholder’s agreement with the new partner. Include clauses that limit the sale of shares within a specified time period (specify that such shares may only be sold to another BEE partner).
- If you self-finance the deal or stand surety on the basis that dividends will be used to repay the debt, ensure that good business practice prevails and that you can pay dividends.
- If you sell shares on the basis that the new owner will earn dividends, you will need to ensure that such dividends are forthcoming.
Noko concludes, “Don’t be tempted by shortcuts. Obtain professional advice regarding B-BBEE compliance and agreements. After all, it’s the success of your business that is at stake.”