Broad-Based Black Economic Empowerment (B-BBEE) Ownership has become a reality to most companies operating in South Africa. As a result of the pressure for businesses to produce not only compliant BEE certificates, but certificates which provide a good score on the procurement element of their client’s BEE ratings, together with the downgrading of the recognition level of a business who does not comply with the sub-minimum requirement of 40% of the target on the Ownership element, businesses are desperate to find ownership solutions.
Private Equity Funds – a solution?
A Private Equity Fund is capital that is put into a new or growing business in return for part-ownership of the business and a share of the profits. Recently, private equity is being used increasingly to fund BEE deals, when white owners want to sell part of their businesses to black entrepreneurs.
What does the law say?
Section 3.10 of the BEE Amended Codes of Good Practice regulates Private Equity Funds.
It states that a Measured Entity may treat any of its ownership arising from a Private Equity Fund as if that ownership were held by black people, where the Private Equity Fund meets the following criteria:
3.10.1.1 At least 51% of any of the Private Equity Managers’ exercisable voting rights associated with the Equity Instruments through which the Private Equity Fund holds rights of ownership, must be held by black people.
3.10.1.2 At least 51% of the Private Equity Fund’s Executive Management and Senior Management must be black people.
3.10.1.3 At least 51% of the profits made by the Private Equity Fund Manager after realising any investment made by it must, by written agreement, accrue to black people.
The following important points must also be noted as per Section 3.10:
- The Private Equity Fund Manager must be a B-BBEE owned company as defined.
- The Private Equity Fund Manager must seek to invest at least 51% of the value of funds under management in companies that have at least a 25% direct black shareholding using the Flow-through Principle.
- Due to the fact that it is a challenge for Private Equity Fund Managers to find companies to invest in that already have a significant black shareholding, in practice it should be allowed to achieve the 51% target over a period of time prescribed in Section 3.10.
It is important to ensure compliance with Section 3.10 when considering a Private Equity Fund to increase your companies’ black ownership. Non-compliance could result in wasted funds and not acquiring the points on the ownership scorecard.
It is therefore crucial to discuss any initiatives which could have a monetary or compliance, and more particularly non-compliance, impact on your business with your BEE Legal Advisor prior to concluding any transactions.
ABOUT THE AUTHOR
Madelaine Loock is a Senior Legal Advisor at SEESA BEE and has been with SEESA since 2009. She completed her LLB degree as well as an LLM degree in Labour Law and is currently in the process of completing an LLD degree in Labour Law. She was admitted as an advocate of the High Court in April 2015.