The BBBEE Commission’s finding on the MTN Zakhele-Futhi transaction affects thousands of companies in South Africa and confirms that a new, intensified phase of BBBEE is at hand. This is the opinion of Piet le Roux, CEO of Sakeliga, based on a preliminary analysis by this organisation’s legal and research team.
The Commission’s findings imply comprehensive corporate disruption for the South African economy, says Le Roux: “The MTN empowerment transaction by all appearances was in line with best practices in BEE and the Broad-based Black Economic Empowerment Act (BBBEE Act). Thousands of transactions, including those of JSE-listed companies, have been structured similarly – and the risks posed by this finding therefore are not limited to the interests of the MTN Group or its shareholders.”
Le Roux says the Commission has erred in its findings and with its recommendations has exceeded its powers: “The findings and recommendations of the Commission run counter to the principles of company law. They represent a misinterpretation of the BBBEE Act. They ignore the quid pro quo that should apply when BEE shareholders obtain shares at a substantial discount. They demand public apologies from a company and its employees who have acted within the realm of their professional judgment and fiduciary duties. And they increase the risk profile of BEE transactions to such an extent that companies in South Africa will now be thinking more than twice before participating in a game where the rules constantly change.”
Le Roux points out that the judgment fits a pattern of intensified and increasingly unreasonable BEE requirements in South Africa: “BEE should be fundamentally reconsidered: as a measure supposed to bring wider and increased economic prosperity it simply does not succeed. Sakeliga has been warning for the past eighteen months of a new, intensified and more damaging phase of BEE. Developments in this phase include the following: In April this year, Zodwa Ntuli, BBBEE Commissioner, described as invalid the majority of trust-structured BEE empowerment transactions. In February, President Cyril Ramaphosa signed the Competition Amendment Bill, incorporating BEE in competition law. In May, Minister Rob Davies published more stringent BEE codes. In 2017, amendments (introduced under the then Minister of Finance, Pravin Gordhan) to the state’s preferential procurement regulations came into force, empowering state entities such as Eskom to exclude white contractors from tenders in advance. And the list goes on.”
Sakeliga’s legal and research team are looking deeper into the Commission’s findings and will be presenting a public information session in due course. Shareholders, business people and other interested parties wishing to be invited or to be kept informed may subscribe to Sakeliga’s distribution list for information on BEE, at www.sakeliga.co.za/en/hot-topics/bee.
A preliminary analysis by Sakeliga’s legal and research team has identified, inter alia, the following four problematic aspects of the findings:
- The Commission attempts to secure for certain shareholders, and in this case a minority shareholder with a 4% interest, more rights than such shareholders normally would receive in terms of company law.
- The attempt to grant MTN Zakhele-Futhi disproportionate participation in the MTN Group is in violation of section 1 of the BBBEE Act, because this section does not entitle BEE shareholders to obtain a greater say than their interest normally would justify.
- Because race is the distinctive basis on which the Commission wants MTN Zakhele-Futhi to have exceptional participation in the control of the MTN Group, it amounts to political favouring of one type of shareholder to the detriment of another.
- The Commission encroaches on the freedom of contract of the parties to such an extent that it is going to be much more difficult henceforth to conclude BEE agreements on a mutually acceptable basis. So, for example, the issuing of MTN Zakhele-Futhi shares was in the first place partially funded by MTN itself, representing a dilution of existing owner’s equity in exchange for certain conditions. Such conditions are aimed at preventing the BEE entity from concluding harmful transactions that could limit the longevity of the BEE transaction, or from making decisions through their board and shareholders that are detrimental to the parent company. This encroachment on the parties’ freedom of contract, boiling down to an ex post facto dilution of equity and effective ownership for existing shareholders, ironically makes BEE transactions even more unattractive to most companies.