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New threshold for BEE transactions positive, but stakes higher - expert

Jun 13 2017 05:00

Cape Town – The stakes for new broad-based black economic empowerment (B-BBEE) transactions are significantly higher and will have a meaningful impact on corporate companies in South Africa, said Soria Hay, head of corporate finance at Bravura investment bank.

Trade and Industry Minister Rob Davies announced in the Government Gazette published on June 9 that the threshold for major B-BBEE transactions will be R25m. Besides the lower-than-expected threshold, the manner in which it will be calculated has been improved considerably.

"Previously, it was announced that a major B-BBEE ownership transaction would be a transaction which equals or exceeds R100m, calculated by either combining the annual turnover of both entities or their asset value," explained Hay, but this definition has now been changed.

READ: BEE and economic imperative - Davies 

According to the new definition, a major B-BBEE transaction is any transaction that has resulted or will result in a measured entity claiming ownership points in terms of the ownership scorecard of the applicable BEE codes of good practice, and where the B-BBEE transaction value is equal or more than R25m.

This amount excludes administration, professional and legal fees. 

Hay points out that although the updated definition is welcomed, the R25m threshold value would still require the majority of B-BBEE ownership transactions to be reported to government.

"This will put the B-BBEE Commission’s capacity to handle large volumes of registrations to the test," she said.

The announcement of the new threshold has retrospective effect, as all major B-BBEE ownership transactions concluded on or after 24 October 2014, must be registered with the B-BBEE Commission within 60 calendar days of the final publication of the announcement. All parties to the transaction have a collective responsibility to register it.

In addition, the regulations set out in the B-BBEE Act stipulate that the registration of a new B-BBEE transaction must occur within 15 business days of its conclusion. 

If approved, the B-BBEE Commission must issue a certificate of registration within 10 days of the application. The Commission then has a 90-day period in which it should assess if the transaction adheres to the B-BBEE Act and advise the affected parties if there are any particular concerns with the transaction.

READ: Call for clarity on SA's empowerment laws 

"This is an indirect approval rather than a notification process as is implied," says Hay. 

The regulations further stipulate that transactions do not need the Commission's approval to commence with implementation but if remedial action is required once the transaction is in progress, this could result in severe time and cost implications. 

"According to the regulations, parties are advised to get input from the Commission’s advisory opinion services before concluding the B-BBEE transaction. As a safeguard, transacting parties would be well advised to factor the 90-day period into their transaction implementation timelines," Hay said. 

READ: Corporations find BEE regulations unworkable 

This development has significant implications. “It seems as if there is a particular emphasis on ensuring that the B-BBEE ownership element is being adequately and sustainably addressed. The registration of major B-BBEE ownership transactions will effectively allow the Commission to vet the details of the transaction to ensure it demonstrates the required criteria."

This clearly expresses a more pro-active intent on the part of the Department of Trade and Industry to monitor B-BBEE ownership transactions to ensure they meet with the spirit of the B-BBEE framework. The areas that the Commission are likely to focus on include, but are not limited to, overly complex structures, lack of minority rights protection, corporate governance failures and third party facilitation, Hay said.

She cautioned companies to scrutinise their current B-BBEE structures and address anything that is inconsistent with scorecard requirements, in order to avoid serious potential penalties.

"This requires a clear and detailed understanding of the provisions of the relevant B-BBEE codes and policy documentation." 

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