BEE Partner, South Africa Economy Watch

Again this is a principle that applies exclusively to measuring ownership contributions. The principle has many different names, such as “one time all time”, “high water mark” and “continuing consequences”. When companies first started engaging in BEE, before there were standard measurement principles, they made the assumption that once they had sold a BEE stake, they would be able to recognise this contribution to BEE regardless of whether the BEE party remained in the investment or not.

The approach was also known as “once empowered always empowered“. The challenge with this approach is that it is easily abused by selling an empowerment share and financing that stake. Dividends dry up, the BEE partner cannot make the repayments and the BEE shareholding reverts to the financiers. The business retains its BEE status and the BEE party is left with nothing.

The ease of abuse discouraged the Codes from recognising this principle and the phase one drafts of the Codes did not recognise it. Where the BEE party exited ownership, a new ownership calculation had to be done based on current credentials. Interestingly, it was Black businesspeople who approached the dti for a modified application of this principle.

To protect itself from losing its BEE partners, a business would insist on lock-in agreements signed by the Black party. The consequence of this, and from a BEE perspective an unintended consequence, is that the BEE party is locked into the investments. In some instances where the BEE party is only looking for a fast profit, the lock in is good because it protects people from themselves. BEE is trying to establish long-term participation in the economy. If it was a once-off event it would have been imposed as a wealth tax. On the other hand, there is a limit to how much you can protect people in business. Preventing entrepreneurs from realising profits and accessing funds restricts the growth of Black-owned capital and economic participation.

The end result is a middle ground that represents a conditional continued recognition of Black ownership. This allows Black entrepreneurs to exit the investment and the measured entity to continue recognising the Black ownership participation. The conditions are onerous because the Codes are still not in favour of the continued recognition. Very few businesses will retain the same amount of ownership points had the BEE party not exited.

Application of the once empowered always empowered principle

The practical application of the once empowered always empowered principle is technical so it has been simplified as much as possible. Keep in mind what is trying to be achieved. The Codes are comfortable with limited continued recognition where the exiting BEE party can demonstrate successful transformation in the company it has been associated with and that there has been value created for the BEE party.

If, after three years, the business has achieved a very good BEE score and the Black party has realised wealth during the association, then the Codes provide limited continued recognition where the BEE party sells a portion of its ownership.

There are two parts to the once empowered always empowered principle. The first is an outright sale of shares. The second is where the equity is used as security for obtaining finance where the BEE party subsequently defaults and loses the shareholding.

1. Sale of shares: Where a BEE party sells a share of its empowerment holding, the ownership points of the measured entity will survive the sale. The measured entity may continue to recognise the points based on a formula. The allowance is only available to the measured entity where:

• the BEE party held the shares in the company for a minimum period of three years
• transformation has taken place in the measured enterprise
• the points retained are subject to the level of transformation the measured entity has achieved。
• value has been created in the hands of the BEE party. (The value is determined in the formula using net value as a basis of calculation.)

2. Loss of equity through security: In an ownership deal, the measured entity is likely to include a clause preventing the BEE party from using the shares as security against any outside borrowing. Should the BEE party default on the borrowing, the financier will claim the BEE shares and the measured entity will lose its ownership credits. The once empowered always empowered principle provides a method for bringing liquidity in the form of borrowing against the shares to the BEE party without penalising the measured entity in the instance of default by the BEE party.

If the BEE party borrows against shares held in a measured entity and defaults on that borrowing, resulting in the BEE party losing the shareholding to the financier, the measured entity may continue to recognise the Black ownership, or a portion thereof according to a formula.

Possibly related posts: (automatically generated)
Black Economic Empowerment (BEE) once empowered always empowered principle

• A Sound and Working Relationship: BEE Partner part 1
• Three levels of Empowerment
• Typical BEE business Partners vs Businesses
• A Sound and Working Relationship: BEE Partner part 3
• BEE QSE Skills Development Scorecard continued
• What is potential Black and White Business Shareholders Roles in Business
• South African Practical BEE Socio-Economic Development
• Do you know how to prepare for a BBBEE Rating?
• Black Economic Empowerment 2004, the legislation