BEE Partner, South Africa Economy Watch

A common misperception of ownership is that it relates to economic return exclusively. When ownership is broken down it includes two primary rights. The one is economic return and the other is control, or influence, over decision making, which is exercised through voting rights.

In the BEE environment, consideration must be given to the lack of funds held by Black people entering BEE deals. The necessity for finance provided an opportunity for ruthless businesspeople to undermine both the control and economic interest components held by Black people in BEE deals. To prevent this abuse, the Codes introduced a third component known as realisation points and, more specifically, the net value indicator. The net value indicator measures the Black person’s unencumbered (debt free) right of ownership. By allocating a high points rating to the net value indicator, businesses are encouraged to reduce systematically the level of debt over the BEE party’s shareholding.

Voting Rights

The objective of BEE is to help Black people gain equal ownership and control of the mainstream economy. Ownership without control represents passive participation. This indicates redistribution rather than active participation. Black people fought a hard struggle to gain the right to vote in the political environment. Voting rights attached to ownership represent the right to vote in the economic environment.

The importance of voting rights is evident in the Companies Act, which only looks at control to determine whether one business is a subsidiary of another business. The Companies Act has no reference to economic benefit when measuring subsidiaries. Control is measured through voting rights either at a shareholder or board participation level. BEE parties approaching ownership deals without sufficient regard for the necessity of preserving commensurate voting rights are not using the BEE policy for its intended purpose.

Where the BEE participation is financed by either the vendor (the seller) or a third party, voting rights may be held by the financier as security for the provision of the funds. The BEE party should negotiate the release of those voting rights on the basis that they will only revert to the financier on default of repayment, which the financier will insist on to protect its interests.

The ownership scorecard is designed to protect the BEE party’s voting rights by including an indicator set to measure voting rights in the entity in the hands of Black people.

Some businesses use a broad base of BEE shareholders in ownership deals with the specific intention of undermining the impact of Black- held voting rights. It is unlikely that a multitude of people with an insignificant shareholding are going to vote uniformly on an issue. Where Black people find themselves in this situation, they should consider pooling their votes under a voting agreement to regain the necessary participation in decision making.

The term “control“, used in the context of voting rights, is misleading and sends the wrong message to existing business owners. The targets set by the Codes are not indicative of control, but rather influence through participation. The targets are set in consideration of the Companies Act requiring a 75% majority vote to pass a special resolution. Setting a target of 25% + 1 vote gives the BEE party the ability to protect itself against unfair decisions made by the company, commonly known as minority protection rights, but it does not give control.

Measuring voting rights

Six points or a part thereof are available where Black people hold the right to participate in 25% + 1 of votes at shareholders meetings. Where the full target of 25% + 1 of total voting rights is not met, the points are awarded on a pro-rata basis.

The voting rights may be measured according to the flow-through or modified flow-through principles as discussed in the section on measurement principles.

Where the voting rights are pledged to a financier, so that the financier takes control of the voting rights if the BEE party defaults, the voting rights may be recognised as held by Black people on condition that the financier has no influence over the voting rights until reverting to the financier on default.

Calculating the points for voting rights

Voting right points are measured using the formula:

A = B/C x D

The score A is calculated as follows:

Step 1 B = Calculate the percentage of exercisable voting rights held by Black people of the total voting rights.

Step 2 Divide the result of Step 1 by C, the compliance target for the ownership criteria being measured (25% of total votes available + 1 vote).

Step 3 Multiply the result of Step 2 by D, the points weighting of that indicator, which is six.

Step 1 may apply the modified flow-through principle or the flow-through principle.

Where the enterprise achieves a score greater than the allocated six points, the scorecard will only recognise a maximum of six points.

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