The Star Early Edition
Nomzamo Xaba, page 18
Lock-ins of black economic empowerment shareholders must become thing of the past
THE FACE of a Black Economic Empowerment (BEE) shareholder has evolved. From the politically connected elite in the early days of BEE dealing when in 1993 Sanlam disposed of its controlling stake in Metropolitan life to the late Dr Nthato Motlana’s consortium New Africa Investments Limited, to South African’s from all walks of life. This is evidenced in the Kumba Iron Ore Envision broad-based employee share participation deal which saw its employees receiving up to half a million rands each in 2011, as well as numerous public offers as was the case of Multichoice’s Phuthuma Nathi, for example.
Since 2003, when the measurement of BEE was first introduced, the Codes Good Practice on BEE (the codes) have gone through a number of amendments. Initially, the focus was on measuring whether a company is owned by black individuals, then there was a move towards broader participation of black ordinary people through the Broad-Based BEE (B-BBEE) codes. This expanded beyond just ownership, but included other elements such as measuring employment equity, skills development, and even procuring from other compliant companies.
However, with the amended B-BBEE Act and its current codes, we find ourselves at the very place we started, focused on black ownership all over again. The weighting for ownership points on the scorecard has increased from 20 percent to 23 percent, while procurement points are heavily weighted towards 51 percent black owned companies – which should be a good thing.
We need to assess whether the current ways that deals are structured is effective and whether it yields the desired effects. With bankers, lawyers, private equity players and other assortments of advisers taking full advantage of the clear business opportunities that exist in South Africa’s economy, the BEE transactions of 2016 are far more complex than the early transactions.
It remains a valid concern that the underlying black shareholder may not be receiving any value from the use of their “blackness”, let alone the legendary lock-in periods that have effectively disabled black shareholders.
We have certainly moved from the days of the gardener who is the chief executive and also the 30 percent shareholder of a company he does not head, to the era, as some might argue, of the complacent black shareholder who knows the value of their “blackness” and for the right price, will sell this commodity to a willing bidder.
Of course this is a generalisation, however there are more and more instances of this happening as indicated by the BEE commissioner’s comments in late October.
When making reference to a BEE transaction, one is generally interested in three critical criteria, that is, do the black people vote in proportion to the shares they hold; do they have the right to benefits of the equity they hold, both the dividend and changes in capital (appreciation and depreciation); and what is the net value in the hands of black people, that is debt free economic participation of their equity? This third criteria being the point of discussion for most advisers.
It is all good and well that black people will sit in a board room and be entitled to a share of equity at some future date, but what do they actually own, free of debt, what value do they have in a company? And what about liquidity concerns? With many a transaction still being funded through some or other form of debt, the point of any BEE transaction should be focused mainly on this net economic value.
Staying in debt
The codes have gone some way to encourage shareholders to put in place mechanisms to pay down the debt in the hands of black people, but far too many transactions are being refinanced, meaning that the black shareholder stays perpetually in debt.
The ordinary South African who has very little in the way of collateral or own funds to buy into new transactions will unfortunately still find himself funded to enter into any transaction of this nature, whether through a vendor funded structure or alternatively through more stringent third party funding via the traditional funding houses.
The prestige that apparently lies with being a B-BBEE shareholder soon loses its appeal once the black shareholder realises that they may be trapped into millions of debt raised to turn them into shareholders, paper-rich but cash-poor. This is compounded when they are unable to realise value when the markets improve, like any other investor can. This wealth may be a function of factors outside of their own control, like their investment asset’s performance in global economic upswings and downswings. Even with all the risk attached to being a shareholder of a company, regardless of race, many South African’s still have dreams of their big break coming through a BEE deal that will change the course of their lives as they become the big man with multiple BEE deals in place.
It is clear that any shareholder is keen to receive the rights of ownership attached to the shares that they hold, and so solutions that give rise to perpetual black ownership for the company while at the same time affording a level of liquidity to the shareholder are the ideal scenario when structuring any deal. Lock-ins of BEE shareholders should become a thing of the past, the new shareholding structures should allow for the shares bought by black people to be tradeable and the process of making this tradeability should be accessible, appropriate and offered at fair value to the ordinary South African.
This will make the participation of black people more robust and it will increase the proportion of black people owning the economy. There are registered stock exchanges in this country have already made strides in making this a reality.
It remains a valid concern that the underlying black shareholders may not be receiving any value from the use of their “blackness”.
Nomzamo Xaba is the group executive of research and advisory for Empowerdex.