Johannesburg - Sceptical local companies are adopting a wait-and-see approach to the continuing consequences principle, the impact of which has not yet been felt on black economic empowerment circles since its inclusion in the BEE codes of good practice 17 months ago.
Although the principle is designed to give black investors an early exit option from BEE ownership schemes, provided wealth has been created, South African companies are still producing empowerment transactions that lock in black investors for periods of between seven and 10 years, and sometimes even longer.
However, in some instances midway through the lock-in periods black investors are allowed to sell their shares to other black buyers, thereby enabling companies to maintain their BEE ownership credentials.
The continuing consequences principle enables companies to claim up to 40% of the 20 points available for ownership on the BEE scorecard even if the empowerment partners have exited. This is subject to black shareholders having held the shares for three years and in that period, economic value having been created.
The companies have an opportunity to find other black partners, otherwise they lose ownership points over time, weakening their chances of securing lucrative government business.
Empowerment observers have noted that local businesses have largely ignored the continuing consequences principle. This is purely because it creates a situation where they could potentially end up concluding empowerment deals more than once if they were deserted by black investors. Since 1994, more than R350 billion worth of BEE deals have been concluded.
According to Leon von Moltke, corporate finance executive at Rand Merchant Bank, local firms will in all likelihood ignore the principle until 2017 when the BEE codes come under review from the department of trade and industry (DTI).
Not impressed
"There is no way of knowing today what effect this review will have on the codes and what BEE requirements, if any, will be enacted in response to the outcome of the review.
"As a result, some corporates have been reluctant to rely on the continuing consequences principle as such reliance may put them at a disadvantage if new BEE requirements are enacted in 2017," says Von Moltke.
White-controlled firms' fear of losing their BEE status is not without reason as there have been instances in the past where companies had to do empowerment transactions more than once after black shareholders left them in the lurch.
One notable example is that of businessman Mzi Khumalo, who was a leading investor in a broad-based consortium that acquired an empowerment stake in mining group Harmony Gold.
Khumalo subsequently bought out other members of the consortium in 2002 and sold the stake in Harmony, earning R1bn from the sale and leaving the gold miner without a BEE partner.
Harmony had to replace Khumalo as a major black shareholder when it merged its operations in 2003 with those of ARMgold, led by Patrice Motsepe.
Khumalo also pulled off a similar stunt in 2006 when he sold in an open market Basil Read shares he had acquired at a huge discount from European firm Bouygues Travaux Publicsin. Khumalo, who reportedly made a cool R70m from the disposal of his Basil Read shares, did this without informing the management of the construction firm. The company was not impressed with his act because it weakened its BEE credentials.
Exceptional case
Khumalo's feat is the exceptional case of a black investor who has managed to navigate his way around the lock-ins. But the majority of investors will have to contend with the lock-ins for the foreseeable future as the continuing consequences principle has so far failed to stem lock-ins.
Had the controversial once empowered, always empowered principle been included in the BEE codes in February last year, instead of the continuing consequences principle, black investors could have been completely freed from the lock-ins or subjected to short-term deals provided debt on their shares was paid off.
This would have been particularly beneficial for black investors wanting to sell when the share prices are high.
"If companies had more confidence that they would get credit for deals already done, they might have concluded shorter-term transactions, which is ultimately better for BEE investors as it could allow them to realise benefits sooner," says Von Moltke.
The once empowered, always empowered principle, backed by the financial services industry, sought to help white-controlled businesses retain their BEE status forever even after black shareholders had liquidated their investment.
But it was thrown out of the window after it came under fierce opposition from the Presidential Black Business Working Group, which feared the principle could block new BEE players from entering the market.
The trade and industry department - which drafted the BEE codes - had its own concerns about the once empowered, always empowered principle.
One of those concerns, according to Yasmin Masithela, a partner at commercial law firm Phukubje Pierce Masithela Attorneys, was that the principle would have given both non-empowered and empowered companies an equal chance of winning tenders.
"The once empowered always empowered principle appears to have been very pro-investee company, as their BEE status would not be lost in spite of an actual change in their ownership structure," she says.