Registration of Major B-BBEE Transactions and implications of COVID-19
Registration of Major B-BBEE Transactions and implications of COVID-19
On 9 June 2017, the Department of Trade and Industry published a notice in the Government Gazette (DTI Notice) stating that all major broad-based black economic empowerment (B-BBEE) transactions with a transaction value equal to or exceeding R25 million should be registered with the B-BBEE Commission.
But what exactly is a “Major B-BBEE Transaction” and when must it be registered? Also, does COVID-19 have an impact on Major B-BBEE Transactions which have already been registered?
What is a “Major B-BBEE Transaction”?
A “Major B-BBEE Transaction” is defined as “any transaction between entities/parties that results in Ownership Recognition in terms of Statement 100 [of the Codes of Good Practice, 2013]”. Transactions in terms of Statement 103 (Equity Equivalent Programmes undertaken by Multinationals) are excluded from this definition.
It is important to note that the definition does not provide that the transaction entered into must be for the specific purpose of obtaining or improving a company’s scoring on the ownership element of its B-BBEE scorecard. The definition is formulated widely enough so that transactions which are entered into by parties for reasons other than B-BBEE ownership recognition, but which nonetheless have this consequence, will be included in its scope.
This, for example, may occur where an acquiring company (in a share transaction) has a higher percentage B-BBEE ownership than the current shareholders of a measured entity and as a consequence of the share transaction (depending on the provisions thereof), the target company (measured entity) will be entitled to claim such higher percentage B-BBEE ownership on its B-BBEE scorecard.
Once it has been determined that the transaction in question results in ownership recognition under the B-BBEE Codes of Good Practice, 2013 (B-BBEE Codes), the DTI Notice requires that the value of the transaction must be equal to or exceed R25 million. Where the transaction is entitled to recognition in terms of Statement 102 of the B-BBEE Codes, the transaction value will be the value of the sale of the asset, business or equity instrument.
If the purpose of the transaction is to improve the B-BBEE ownership recognition of the measured entity (target), then, typically, the shares or assets of such measured entity are sold at a discounted price. Such a discount may have the consequence that although the value of the shares or assets being acquired is equal to or in excess of the R25 million threshold, the purchase consideration payable under the transaction, falls below such threshold. In such cases, where a discount is applied, parties must make use of the actual value of the shares or assets being acquired to determine whether the threshold for the registration of the transaction as a Major B-BBEE Transaction has been met or not.
When must a Major B-BBEE Transaction be registered?
The Regulations published in terms of the B-BBEE Act (B-BBEE Regulations) provide that a party that enters into a Major B-BBEE Transaction shall, within 15 days of concluding the transaction, submit the transaction for registration with the B-BBEE Commission. It must be noted that the time period indicates that registration must occur within 15 days meaning 15 calendar days and not 15 business days.
But when does the 15-day period start? The B-BBEE Regulations indicate that the calculation of the period commences upon the conclusion of the transaction, but no definition or explanation is provided as to when a transaction is considered as being concluded for B-BBEE purposes.
From our perspective, the agreement which gives rise to a transaction is usually subject to suspensive conditions, which have the consequence of suspending the implementation of such transaction. Therefore, up until such time as the suspensive conditions have been fulfilled and/or waived (as the case may be), the possibility exists that the transaction may fail.
As such it is our view that the term “concluding of transaction” means the date upon which the suspensive conditions are fulfilled and/or waived (as the case may be) as this is the date on which the transaction is actually concluded. However, it must be kept in mind that where the agreements provide for an effective date or a closing date which is beyond the date on which the suspensive conditions are fulfilled and/or waived (as the case may be), that it is the date of fulfilment or waiver of the suspensive conditions which is used as the date from which o calculate the time period in which documents are to be submitted to the B-BBEE Commission.
The B-BBEE Regulations provide that upon receipt of the registration of a Major B-BBEE Transaction, the B-BBEE Commission must immediately acknowledge receipt of the registration in writing and within 10 days, issue a certificate of registration to the party that submitted the transaction if the requirements for registration have been met. From the B-BBEE Regulations it appears that the B-BBEE Commission has no discretion as to whether to issue a certificate of registration or not.
The B-BBEE Regulations further provide that it is only within a period of 90 days after the registration of the Major B-BBEE Transaction, that the B-BBEE Commission may assess the transaction to determine its compliance with the provisions of the B-BBEE Act. Once it has attended to such assessment (and presumably within the aforesaid 90-day period), the B-BBEE Commission will then communicate with the parties in respect of any concerns which it may have.
Although the B-BBEE Regulations provide for this 90-day period, it has been our experience that the B-BBEE Commission may provide its input even as far as a year after the Major B-BBEE Transaction has been concluded. This creates its own level of complexity where the B-BBEE Commission raises concerns which may only be resolved by amending certain of the transaction documentation or even revising the structure itself.
Implications of COVID-19
It must be kept in mind that the B-BBEE Regulations not only address the registration of a Major B-BBEE Transaction, but also any amendments thereto. The B-BBEE Regulations specifically provide that the B-BBEE Commission must be notified of any material change to the broad-based black economic empowerment elements of the entity occurring after the registration of the Major B-BBEE Transaction, provided that such material change meets the registration threshold requirement of being a transaction value equal to or exceeding R25 million.
It is important to note that although a Major B-BBEE Transaction relates to those transactions resulting in ownership recognition, the requirement to notify the B-BBEE Commission in respect of any major change relates to all the elements on the relevant measured entity’s scorecard. Accordingly, where there is a change, for example, in the Skills Development element which meets the abovementioned threshold, the measured entity will be required to notify the B-BBEE Commission of such material change.
With the occurrence of the COVID-19 epidemic and the lockdown of South Africa, many companies will be considering ways in which to restructure their organisations in order to reduce costs (including retrenching employees). These measures (as well as others) may have an impact on Major B-BBEE Transactions which have been previously registered with the B-BBEE Commission. For example, if a company undergoes a mass retrenchment of its staff complement as a result of COVID-19, this may have a negative impact on its Skills Development element, which (if it meets the relevant threshold) will need to be notified to the B-BBEE Commission.
The B-BBEE Regulations do not provide any detail as to the consequences of such notification to the B-BBEE Commission or whether it is merely a means for the B-BBEE Commission to update its records regarding Major B-BBEE Transactions. The latter seems unlikely as the notification is not only in respect of changes to the Ownership element of the measured entity’s B-BBEE scorecard, but any other element where a major change (provided the threshold has been met) may occur. In addition, no indication is provided as to what the consequences are if the B-BBEE Commission is not notified of such major changes. However, it is our experience that it is better to comply with the requirements of the B-BBEE legislation in a timely manner in order to prevent lengthy consultation processes with the B-BBEE Commission in respect of non-compliance.
Clients will need to take into consideration this notification requirement when making any changes to Major B-BBEE Transactions which were registered in the past.
We are happy to assist with any queries which our clients may have with regards to the registering of Major B-BBEE Transactions as well as any material changes thereto.
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