The Star Early Edition

Nomzamo Xaba, page 18

Lock-ins of black economic empowermen­t shareholde­rs must become thing of the past

- Nomzamo Xaba

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.

Desired effects

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.

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