BEE Partner, South Africa Economy Watch

A business dealing substantially with an institution such as Escom, will have to give due consideration to becoming a black owned company, which means that such business must have a BEE party holding more than fifty percent of the equity.

This then becomes a watershed decision to the SME owner, as he now has to relinquish control over the business, which has possibly taken him a lifetime to create. Should he elect to remain in the business as a minority shareholder, he would want to make sure that the BEE party taking over the business will indeed succeed in operating it successfully.

In most other cases it will suffice to accommodate a BEE party with more than twenty-five percent equity in a business.

The minimum shareholding is twenty-five percent plus one share, which will provide the BEE party with a strategic shareholding, as this percentage equity is sufficient to stop any special resolution a company wants to pass in term of the Companies Act.

Therefore, the secret in selecting a suitable BEE party ultimately lies in the success, which a business has achieved in the past and the extent to which this success is reflected in its audited financial statements.

Many SME owners feel uncomfortable with the thought of sharing their business with an outside party and questions relating to the day-to-day running of the business, the decision-making process, remuneration policies, transfer of shareholding on death or disability of a shareholder and many other related issues need to be answered.

The important issue to remember when accommodating a BEE party as a shareholder in a business is that shareholding in a business does not equal employment.

Shareholding in a business provides the shareholder with certain rights and obligations as shareholder. These rights and obligations are usually contained in a Shareholders Agreement as well as the Articles and Memorandum of a Company.

Employment on the other hand is usually governed by a proper Contract of Employment, which contains all the employee’s rights and obligations in terms of his employment.

Neither the SME owner nor the BEE party should confuse these two issues at any time.

It is probably the single biggest confusion in the minds of both SME owners as well as BEE parties: the fact that they regard shareholding in a business as a right to employment.

In fact the confusion goes even further as a large number of SME owners and potential BEE parties regard shareholding in a business as a passport to gaining access to employment rights, which goes well beyond the normal rights an employee might enjoy in terms of an employment contract. They believe incorrectly that a shareholding in a business entitles one with employment in that business for as long as one has the shareholding. They also believe incorrectly that a shareholding entitles one to remuneration from the business linked directly to the percentage shareholding and that the remuneration is not as a result of the actual position held in the business.

Every employee of a business is entitled to remuneration from the business based on their employment contract. Shareholders are only entitled to their share of the profits of a business and only once the profits are declared as dividends.

SME owners are usually afraid that a BEE partner might want to drive an expensive vehicle paid for by the business and would have the desire to make huge random drawings from the business. This fear probably originates from the fact that they themselves do exactly that and therefore expect that once a BEE partner comes on board then they will have to share such behaviour.

What the SME owner really fears is that the business simply does not generate enough cash for someone else to share it with.

Fortunately all successful BEE transactions are structured through proper legal documentation, which will always include a detailed Shareholders Agreement, as well as detailed Employment or Management Contracts.

A Shareholders Agreement could provide the SME owner with some protection in the case where it is found that his new BEE partner in the business turns out not to be what he had expected.

Detailed employment or management contracts are essential in all BEE transactions as they provide detailed job descriptions for all shareholder employees. Furthermore they contain details of entitlements of these shareholders as employees.

In other words the Shareholders Agreement together with the employment contracts is a tool, used to contain all parties‘ expectations.

It should become apparent now that once a BEE structure has been put into place with all the necessary legal documentation, it usually contributes to good corporate governance. A suitable BEE party to be accommodated in a business by way of shareholding should have no problem in adhering to proper corporate governance.

With more than one shareholder involved in a business it becomes more difficult for a SME owner to treat his business as his personal banker.

It is in both parties‘ best interests to support all efforts relating to the drafting of proper legal documentation and a suitable BEE party would usually have a clear understanding of the difference between Shareholding and Employment and the rights and obligations pertaining to each.

Possibly related posts: (automatically generated)
A Sound and Working Relationship: BEE Partner part 2

• Typical BEE Business Partners
• A Sound and Working Relationship: BEE Partner part 1
• A Sound and Working Relationship: BEE Partner part 3
• Guidelines for Shaping Strategic Thought continue...
• Black Economy Empowerment Employment Equity part 2
• Shaping a new breed of South African manager for the global challenge part 10
• Application of Bee business Ownership
• Beneficiary Black Business Enterprise Development
• Modern Money — Asset and Liability continue...