"Participation Builds Unity"
"MADE IN AFRICA - FOR AFRICA"
"Participation Builds Unity"
"MADE IN AFRICA - FOR AFRICA"
PRESENTS
The new "legal regime" for BEE
COURTESY
Liron Meister (Associate)
Morné VAN DER MERWE (Director – Corporate and Commercial Law)
WERKSMANS INC
(SOUTH AFRICA)
WERKSMANS INC
(SOUTH AFRICA)
DO VARIOUS PIECES OF LEGISLATION CONFLICT WITH OR ENHANCE THE BEE CHARTERS AND THE BROAD-BASED BLACK ECONOMIC EMPOWERMENT ACT?
On the tenth anniversary of South Africa's transition into a free and democratic society, the enactment of the Broad-Based Black Economic Empowerment Act ("Empowerment Act") underscores South Africa's commitment to readdressing injustices of the past. It creates a legal framework to promote economic participation and wealth redistribution to the majority of the population who were previously systematically disenfranchised and refused the right to participate in the economic wealth of South Africa.
The Empowerment Act serves as the legal roadmap towards achieving a fair and equitable right of participation in our economy.
This article aims to identify where the objectives of the Empowerment Act, as the driving force for black economic empowerment (“BEE”) in South African commercial and business life, are in conflict with or enhance other commercial statutes - such as the Companies Act, the Income Tax Act, the Competition Act, the Employment Equity Act, the Skills Development Act and the Preferential Procurement Policy Framework Act – and how these objectives can be aligned.
The new legal regime for BEE
South Africa’s Constitution serves as the legal foundation for a democratic and free society. It is the ultimate protector and guiding force for each individual’s claim to dignity, equality and freedom. The Empowerment Act can be seen as the embodiment of the right to equality contained in section 9 of the Constitution, and therefore finds its roots not in terms of policy but directly from the Constitution itself.
The Empowerment Act establishes, not by means of obligations, but by means of various guidelines the legal foundation for a change in the racial composition of ownership, management structures and the skilled occupations of existing and new enterprises, as well as for the promotion of economic transformation to enable meaningful participation of black people in the economy.
The Empowerment Act defines "black people" as Africans, coloureds and Indians. This term must be read with the definition of "broad-based black economic empowerment" which stipulates that the economic empowerment of all black people includes women, workers, youth, people with disabilities and people living in rural areas.
BEE will be facilitated by threefold means. The first is the Codes of Good Practice, which shall include indicators to measure broad-based BEE and guidelines for transformation charters. The second is a strategy for broad-based BEE by the Minister of Trade and Industry (“strategy document”). The third is the transformation charters for particular sectors of the economy which have been developed by the major stakeholders in that sector and which advance the objectives of the Empowerment Act.
The guiding principles of the Empowerment Act, by which the three aforementioned facilitators of BEE shall follow, are -
to increase the number of black people that manage, own and control enterprises and productive assets;
to facilitate ownership and management of enterprises and productive assets by communities, workers, cooperatives and other collective enterprises;
to develop skills among human resources;
equity representation in all occupational categories and levels in the work force (i.e. employment equity);
preferential procurement; and
to invest in enterprises that are owned or managed by black people.
While the Empowerment Act is undoubtedly a progressive step towards achieving BEE, its practical implementation may experience difficulties with other existing pieces of legislation. Some of these potential challenges are discussed below.
The Companies Act
When a company embarks on a BEE exercise, the purpose of which is to achieve a transfer of ownership and control in it to a BEE entity, such an exercise would in many cases involve the acquisition of shares in that company by the BEE entity. In many instances the BEE entity may lack the necessary capital to acquire the shares and therefore require financial assistance. In order to comply with their BEE objectives, many companies will therefore seek to facilitate the acquisition of its shares on behalf of the BEE entity.
Yet section 38 of the Companies flatly rejects the possibility that a company financially assist, directly or indirectly, any person to acquire shares in the company. The consequences of contravening section 38 are severe, and the transaction will be deemed to be void.
This is not to say that section 38 poses an absolute barrier to BEE transactions in which shares are to be acquired. Parties are not prohibited from structuring their affairs in such a way so as to avoid the application of this section, as long as such restructuring is not seen as a disguise for providing financial assistance. It may, however, force BEE transactions to be more complex, and consequently more costly. In many cases the BEE partner will acquire shares not directly in the company but through a special purpose vehicle (“SPV”). An external financier will provide the SPV with the necessary funding for the acquisition of the shares in the company, and consequently require the BEE partner’s shareholding in the SPV to be held as security for the SPV’s obligations. With such a structure, the risks are commensurately greater than had the company simply been allowed to financially assist its BEE partner.
We suggest that section 38 be reconsidered, not only to accommodate BEE but also in light of the introduction of share buy-backs and associated capital adequacy rules into the Companies Act.
The Income Tax Act
A broad-based BEE restructuring, while laudable, could result in significant tax consequences for the company under the Income Tax Act. Government's objectives in the Empowerment Act are at times at odds with what is possible under our tax regime. This can be best illustrated in the examples that follow below.
Currently the law is structured in such a way that shifting assets within a group will be deemed to have been done at market value even though the transfer is between two wholly owned subsidiaries at book value. Transferring at market value may result both in income tax and in capital gains tax, though certain exemptions are available. One of these is that assets may be transferred between group companies only where the company's equity share capital is held within the group to the extent of at least 75%.
The company would, therefore, have to restrict any transfer of its assets to 25% of its share capital or it could be liable for either income tax or capital gains tax if the market value of those assets is higher than their values for tax purposes. Yet the strategy document and the transformation charters currently envisage ownership levels in excess of 25%.
It is clear from the above example that our tax regime is not user friendly to the facilitation of BEE. To assist with achieving the goals laid out in the Empowerment Act, there will clearly be a need to reform certain elements of our fax regime. It seems, however, that such reforms will not be forthcoming in the very near future. The proposed changes set out in this year's budget speech will have the likely effect to increase the cost of funding for BEE transactions. Such changes would include the re-categorisation of redeemable preference shares as debt (which will result in dividends paid being fully taxable), and the re-categorisation of compulsory convertible debentures into equity (which will result in interest paid no longer being treated as deductible). Prior to this proposed re-categorisation, many BEE transactions relied on the tax benefits traditionally accruing to these instruments.
It appears that no tax concessions will be provided in this regard and it will therefore become more difficult to implement and achieve the objectives of the Empowerment Act.
The Competition Act
The Competition Act is unique in comparison to its foreign counterparts. The Act attempts to balance regulating a more competitive and efficient economy in South Africa while redressing the injustices of apartheid by promoting a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantages persons. This dual purpose is in line with the Empowerment Act's objectives.
For instance, to achieve this dual purpose the Competition Act will overlook mergers between different entities or enterprises which are otherwise likely to substantially prevent or lessen competition, if such merger can be justified on public interest grounds, one of which will be the ability of firms owned or controlled by historically disadvantaged people to become more competitive.
The Employment Equity Act
This Act lays out the requirements for affirmative action designed to ensure that suitably qualified people from designated groups (those groups that have been systematically discriminated against in the past) have equal employment opportunities and are equitably represented in all occupational categories and levels in the workforce of a designated employer. A "designated employer" in terms of the Act is defined to mean a person who employs fifty or more employees or a person who employs fewer than fifty employees but has a total annual turnover that is equal to the applicable turnovers set out in the schedules to the Act.
The Employment Equity Act, when analysed in the context of the new legal regime for BEE, will in all likelihood be incorporated into the various transformation charters and the Codes of Good Practice. Targets will therefore be included in the transformation charters and presumably, in the Codes of Good Practice for the equitable representation in all occupational categories and levels in the workforce.
There may, however, be some areas where the objectives of the Empowerment Act may be modified in order to work congruently with the Employment Equity Act. The Employment Equity Act stipulates that the designated employer shall not take any decision concerning an employment policy or practice that would establish an absolute barrier to the prospective or continued employment or advancement of people who are not historically disadvantaged persons. As such, the Employment Equity Act will probably qualify the manner in which the targets in the transformation charters or the Codes of Good Practice must be achieved.
Furthermore, it seems that the Empowerment Act has a wider application. The Employment Equity Act applies only to designated employers, whereas the Empowerment Act stipulates that all enterprises or entities must bring about an equitable representation of black persons in all occupations and at all levels of the organisation in which they are employed regardless of whether such enterprises or entities qualify as "designated employers".
The Skills Development Act
The Skills Development Act provides an institutional framework to devise and implement national, sector and workplace strategies to develop and improve the skills of the South African workforce, to integrate those strategies within the National Qualifications Framework contemplated in the South African Qualifications Authority Act, to provide for learnerships that lead to recognised occupational qualifications, to provide for the financing of skills development by means of a levy financing scheme and a National Skills Fund and to provide for and regulate employment services. One of the specific purposes of the Act is to improve the employment prospect of persons previously disadvantaged by unfair discrimination and to redress those disadvantages through training and education.
It is apparent from the aforegoing that this Act enhances the human resources and skills development principle referred to in the Empowerment Act.
The Preferential Procurement Policy Framework Act
It is the purpose of this Act to give effect to section 217(3) of the Constitution by providing a framework for the implementation of procurement policy.
Section 217(1) of the Constitution deals specifically with the issue relating to procurement by an organ of State and provides that where such an organ contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.
Section 217(2) of the Constitution provides that nothing in the aforementioned sub-section(1) shall prevent an organ of State from implementing a procurement policy providing for categories of preference in the allocation of contracts and the protection or advancement of persons or categories of persons, disadvantaged by unfair discrimination.
It is apparent from the aforegoing that this Act gives legal meaning to the aforesaid section 217 of the Constitution and further to the preferential procurement principle contained in the Empowerment Act.
Conclusion
The enactment of the Empowerment Act is a positive step towards achieving a comprehensive legal framework for the transformation of our economy and the equitable distribution of its resources. Although the Act does not set down detailed obligations as to the manner in which such transformation is to take place, it sets in place various guidelines and objectives of what this transformation should achieve. As such it leaves plenty of space for other pieces of legislation to give effect to its objects and purpose.
Insofar as existing statutes do not accommodate these objects or purpose, they will need to be reviewed and may be amended. Nevertheless, it can be said that the Empowerment Act and the new legal regime for BEE created under it, is of fundamental importance to the transformation required to provide economic participation and wealth redistribution to those South Africans who, prior to 1994, were deliberately excluded from the economy.
Acknowledgements:
DATE: 30 April 2004
Authors:
Morné van der Merwe (Werksmans, Director – Corporate and Commercial Law)
mvdmerwe@werksmans.co.za
Liron Meister (Associate)
Ernest Mazansky (Werksmans Tax, Director)
Neil Kirby (Werksmans, Director, Constitutional and Administrative Law)
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