A roadmap for BEE success

As indicated in my previous Industry Insight, black economic empowerment (BEE), if implemented correctly, can unlock value and opportunities for all parties involved.

Here are some guidelines that I believe should form the basic roadmap for the implementation of any BEE policy or strategy.

"One size fits all" does not apply to BEE. The BEE requirements of each company need to be carefully analysed from both an external and internal perspective. By this I mean that a company`s BEE policy will depend on external factors such as industry charters and legislation and the empowerment requirements of clients. From an internal perspective it is important to ensure the BEE partner will be able to fit in as a true partner and enhance the manner in which the company operates.

BEE does not automatically mean sourcing an external black shareholder. In line with current thinking on BEE, companies should also be looking internally to their black employees with a view to converting such employees from their current status to that of owner/manager. This broad-based empowerment could be achieved by making use of an empowerment trust. In terms of the workings of the empowerment trust, the beneficiaries would be entitled to a percentage of the dividends which flow from the trust`s shareholding in the company, as well as any proceeds realised from the sale of the business. Through the mechanism and workings of the empowerment trust, the beneficiaries would be given the opportunity to participate in the management of the company and acquire direct ownership of shares in the company.

In short, and in accordance with current thinking on BEE, black employees may well be a company`s perfect match in so far as BEE is concerned.

"One size fits all" does not apply to BEE.

Sean Sim, attorney,

Companies need to accept the reality that any BEE structure they implement will be subjected to aggressive challenges from competitors and, in some cases, in-depth audits from customers. Therefore, they need to ensure, from the outset, that the structures implemented will be beyond reproach.

Furthermore, any BEE structure must at least address the issues of beneficial ownership, management, skills transfer and procurement.

BEE transactions by their very nature require a certain amount of creativity and a large amount of understanding.

From the existing shareholders` perspective there needs to be an understanding that they will, in most cases, be obliged to assist the BEE shareholder in purchasing a share in or of the business. The BEE shareholder must accept the commercial risk involved in the transaction, as well as the reality that BEE may not take place overnight.

I am certainly not advocating that a share of the business is merely given away but rather, as I have already stated, that BEE transactions, in their implementation, require a certain amount of creativity.

This creativity could take a number of forms, such as:

* The company buying back its own shares.

* Allowing the BEE partner to finance the purchase of their shares out of the company`s dividend flow.

* The shareholders/company selling the business to a new entity in which they and the BEE partners are shareholders.

* The BEE partner paying for a portion of shares by increasing the value of the business.

Accept the fact that BEE has a shelf life of at least 10 years. In short, it is no longer disputed that all businesses will have to become empowered; the question is now merely one of timing. Without taking away from the fact that BEE is a process but rather precisely because it is process, the sooner businesses commence with the implementation of a BEE strategy the better.

One of the starting points for any BEE transaction is to analyse and understand the tax and company law implications of such transaction.

From a tax perspective, the Receiver of Revenue has a tremendous arsenal of tax legislation at its disposal and is using this arsenal with increasing effect.

In any BEE transaction, the following taxes, at the very least, would need to be considered: capital gains tax, donations tax, income tax, VAT and secondary tax on companies.

From a company law perspective, of particular importance are the restrictions against a company assisting a third-party to purchase its shares as well as the many fiduciary duties of the directors.

Suffice is to say the tax and company law implications of any structure, if not understood, could prove to be fatal in so far as the transaction is concerned.

If implemented correctly, and viewed as the opportunity which it is, BEE will ensure the continued growth of a business as well bring about significant increases in the numbers of black people that manage, own and control the country`s economy.

Having accepted the reality that the only things you can be certain of are death, taxes and BEE, I will in my next Industry Insight analyse the empowerment charter and the impact it will have on businesses.