We are all aware that the most common approach to BEE Ownership is share ownership by Black investors however the option of ‘Sale of Assets’ for Ownership recognition should not be overlooked.
Other typical alternatives may include:
Broad Based Ownership Schemes and Employee Share Ownership programmes
Ownership held by Trust
Equity Equivalent programs
Ownership held through options, share warrants and preference shares
Ownership via sales of assets sounds very simple and can be if done properly as it merely involves selling a productive asset to Black investors. Assets may include: property and operating plants (sites, not machinery) as well as equity investments and businesses and recognition is driven by the relative value of the asset sold versus value of the selling entity.
Additionally, the Black ownership status of the purchaser will be taken in to account as increased relative values and ownership status will increase the percentage of recognised BEE Ownership for the seller.
The B-BBEE Codes of Good Practice allow for certain types of sale of assets to contribute to your ownership points.
This is only possible if a Sale of Asset is done to a (minimum) 51% black owned entity. This includes the sale of a building, land, warehouse, IP, equipment, an operating division, a license or any other defined asset. The value of the Asset as a percentage of the measured entity determines the Ownership percentage score, allocated to the entity and this transaction is then measured over three years. The value of the transaction in year 3 is then applied as the Ownership score indefinitely.
In a nutshell: The asset must be valued, and compared to the value of the entire business. This is the basis for recognition. If the asset is worth 10% of the whole business, then a company could be regarded as having sold 10% of its business. The new owner’s status is used to then calculate the points.
A sale of assets transaction will result in increased participation by Black people in the economy through ownership and control of assets.
BEE Ownership is a priority element. If a minimum threshold of Net Value is not achieved, then a measured entity will be penalised by dropping a level on its BEE status. The most important aspect of the Ownership scorecard is measurement and scoring of Net Value; i.e. wealth creation for Black persons.
A Sale of Asset transaction must meet certain recognition requirements:
- The transaction must result in the creation of viable and sustainable businesses or business opportunities in the hands of Black people;
- The transaction must result in the transfer of critical and specialised skills, managerial skills, and productive capacity to Black people;
- The transaction must involve a separately identifiable related business which has no unreasonable limitations or conditions with regards to its clients or customers, and clients, customers or suppliers other than the seller;
- BEE shareholders or their successors (if the BEE shareholding is the same or improved) must hold the asset for a minimum of three years;
- Any operational outsourcing arrangements between the seller and the purchaser must be negotiated at arms-length on a fair and reasonable basis;
- The transaction should be subject to a valuation by an independent expert;
- A repurchase transaction cannot be entered into within a three period after transaction implementation, even if transaction implementation is deferred post year three;
- Ownership points are subject to existing contracts between the parties to remain in effect on market related terms, subject to marked norm service levels.
Note: The codes say “transfer of business rights by way of license, lease or other similar legal arrangements not conferring unrestricted ownership; and sales of franchises by franchisors to franchisees, but includes sales of franchises from franchisees to other franchisees or to new franchisees do not qualify for recognition”.
Traditional Net Value assessment (in a share ownership transaction) involves application of a series of formulae that input value of the measured entity, the value of related shares held by Black investors, as well as their outstanding acquisition debt, in order to assess related net asset value of the Black investor as a proportion of the value of the measured entity.
Businesses should consult with a B-BBEE professional to obtain the most up-to-date information and advice as a means to improve their B-BBEE Scorecard.
Author Craig Tonkin