Original publish date – Thu, 19 Nov 2009 07:08:14 +0000, Keith

Business Report has an article quoting Cyril Ramaphosa. He is complaining about lock-in clauses and the fact that the BEE codes have a “once empowered always empowered clause” that encourages businesses to offer loans to “BEE partners”, and lock them in for up to 10 years. Often the partner cannot repay the loan so the business repossesses the shares but does not lose their BEE points because of the “once empowered, always empowered” clause.
This is what he says – unfortunately he is wrong about the “once empowered always empowered” clause. It simply does not exist! What does happen is companies DO have lock-in clauses, and they have sometimes re-possessed the shares when the partner could not repay the loan. Group 5 is a case in point, and it is something that I do not like, so on that point we do agree with Mr Ramaphosa. However there is no “once empowered always empowered” clause in the codes of good practice.

There was lots of talk about it: The concept was if a company lost its back shareholders they would retain the points they had earned before the shareholding was lost. This would have been a way for unscrupulous companies to front by making life intolerable for their investors, find a pretext to get rid of them and retain their points. In extreme cases a company could have sold (given)  shares today to a black beggar, taken the shares back tomorrow and continued as if it had the black shareholding forever.

Were this the case, then Mr Ramaphosa’s point would have been valid. The true situation is that the codes do recognise specific situations where the company has lost its black shareholding, and does make fair allowances for both parties. This is known as “Recognition of ownership after loss or sale of shares.

This clause, par 3.5 of code 100, statement 100 explains that under certain circumstances a company can recognise SOME of its points if teh sahres are lost or sold, under very specific circumstances. The example above does not count as being an accecptable circumstance. Some of the rules are:

1) The shareholder must have held his shares for more than 3 years
2) Value must have been created in the hands of the shareholder
3) Transformation must have taken place in the enterprise

Under those circumstances only about 40% of the points  (this is a complicaed calculation) that had been earned can be recognised by the company, and they can only be recognised for as long as the period that shareholder originally held those shares.

This is very different to a “once empowered always empowered” clause. Cyril’s biggest complaint about the “once empowered always empowered” rule is the black parties do not benefit at all from a failed deal. Clause 2)  above makes it clear that a company can only recognise continued ownership if the black partners had value created in their hands. So, if there was no value created, the company cannot recognise any points from that failed deal.

It should also be reconignised that companies earn maximum points only if shares are being paid off during the period of the deal. If no shares are paid for then the company will lose up to 8 points on its scorecard. This should be an incentive to companies to try to ensure their partners do benefit financially and can start paying off the loans immediately in order to improve their scorecard.

This clause, the recognition of ownership after loss of sale of shares, seems fair enough and protect both sides. There was the celebrated case of Mzi Khumalo who held shares in Basil Read and sold those shares to restructure his protfolio. This was a perfectly valid business deal and he was fully entitled to sell shares he owned. Basil Read, on the other hand suddenly found themselves without a black sharehholder and since there shares are tightly held had great difficulty in findind shares for another partner to purchase. It makes business sense to offer a substantial discount to a partner in order to encourage him to stay for the “long haul”. If the discount is sufficiently large then the business partner would be eager to purchase, knowing that he cannot sell for say ten years (the lock-in clause Cyril talks about).

In the above press article a BEE consultant refers to the financial sector charter stating that it does have such a clause. However the FSC does not exist as a legal document, and is not a legal sector code so it cannot be used as a reference point. One of the many reasons that the FSC cannot be finalised is because it uses definitions different to those in the codes.