New BEE codes may call for company reviews

many companies may be forced to review their black economic empowerment deals this year following the release recently of government's draft codes of good practice, say empowerment analysts.

empowerment transactions worth more than r40bn were concluded last year in sectors such as financial services, information communications and technology .

some of the empowerment deals signed last year include the first major banking industry transaction, in which investec sold 25,1% of its equity for r810m to a consortium led by black-owned tiso group and peu investments.

insurance group sanlam agreed to sell an initial 10% stake to ubuntu-botho investments, a consortium led by patrice motsepe. the consortium will pay r200m to fund the purchase.

standard bank and liberty group sold 10% stakes in their local businesses for a combined value of r5,4bn to the tutuwa consortium, jointly led by saki macozoma's safika investments and cyril ramaphosa's shanduka.

however, once the codes of good practice are endorsed and become part of the broad-based black economic empowerment act later this year, many transactions whose signatories claimed they were broad-based might not be deemed so by government.

the codes are meant to provide guidelines and principles on how to implement broad-based black economic empowerment in the public and private sectors.

it is hoped the release of the codes will eliminate uncertainty and misinterpretation of what government's intentions were when it introduced broad-based black economic empowerment.

however, safiyya patel, a partner in the corporate and commercial law division at sonnenberg hoffmann galombik, says: "the codes are likely to cause some controversy and may result in architects of the empowerment deals having to go back to the drawing board."

one of the issues that the codes address is fronting.

"fronting structures, according to the codes, generally claim a higher empowerment status than the actual economic benefits flowing to black beneficiaries would suggest," says patel.

"as a result, the codes stipulate that the measurement of equity ownership by black persons for purposes of the empowerment scorecard must take into account the flow-through principle.

"the flow-through principle states that if equity is held by a juristic person, only the portion owned by black people in the holding enterprise will be recognised.

"this applies throughout the chain of ownership to the point where the benefit is received directly by a black person. as such, only effective levels of ownership by blacks are recognised for measurement purposes."

patel says that the application of the new flow-through principle is likely to turn several "done deals" on their heads.

"this is particularly so in cases where empowerment deals were concluded with enterprises that are not 100% black-owned and were structured on the basis of the ownership interest in the hands of the black enterprise rather than in the hands of the black individuals who own the enterprise."

empowerment agency empowerdex ceo vuyo jack says the need to review empowerment deals already concluded was a step in the right direction.

"how far have the deals really benefited black people, or are they still paying back loans even after seven to 10 years with no voting rights or economic benefits?"