Introduction

One of the key elements of broad-based black economic empowerment (B-BBEE) in South Africa is empowered ownership by Black persons. Most often, empowered ownership is achieved through the sale of shares in an existing business to an empowered partner. However, the relatively less trodden path of a sale of assets or business has recently been receiving more attention and is equally able to achieve enduring empowerment and enable the meaningful participation of Black groups in the economy by directly engaging such groups in the operation of sustainable businesses. 

The principles and requirements for the qualification of a sale of assets or business for ownership points under the B-BBEE scorecard are contained in Statement 102 of the BEE Codes.1 We highlight below some of the key requirements and restrictions of Statement 102 and consider the example of the Barloworld Khula Sizwe transaction, in respect of which Dentons acted as legal adviser to Barloworld. 

Statement 102

In principle, an entity (a Seller) that has concluded a transaction involving a sale of assets or business of a “separately identifiable related business” may claim ownership points under Statement 102. A “separately identifiable business” is a business related to the Seller by virtue of that business being a subsidiary, joint venture, associate, business division, business unit, or any other similar related arrangements. The separately identifiable business must fall within the ownership structure of the Seller. 

Overview of key requirements

  1. The transaction must result in the creation of viable and sustainable businesses or business opportunities in the hands of Black people.
  2. The transaction must result in the transfer of critical and specialised skills, managerial skills and productive capacity to Black people.
  3. A sale of an asset or business must involve a separately identifiable related business which has:
    • no unreasonable limitations or conditions with regards to its clients or customers;
    • clients, customers or suppliers other than the Seller; and
    • B-BBEE shareholders or their successors holding the asset for a minimum of three years.
  4. Any operational outsourcing arrangements between the Seller and the separately identifiable related business must be negotiated at arm’s length on a fair and reasonable basis.
  5. The transaction should be subject to an independent valuation by an independent expert. If, for example, a property is being sold, it would be prudent to have an independent property expert perform a valuation on the property, as well as set the key financial terms of any leaseback arrangement (e.g. rental, escalation rates etc).

Excluded transactions

Statement 102 provides that certain transactions cannot qualify for ownership points, specifically: 

  1. transfers of business rights by way of licence, lease or other similar legal arrangements not conferring unrestricted ownership; 
  2. sales of franchises by franchisors to franchisees; and
  3. transactions that include a right to repurchase the asset or business within three years, even if the repurchase implementation is deferred post year three. 

Enduring empowerment points for the Seller

Ownership points for a Statement 102 disposal are calculated in accordance with a specified formula over a three-year period. For each year after the third year measurement, the Seller can recognise ownership points based on the ownership indicator percentages achieved in the third year date of measurement. 

The Codes do not place an end date on the recognition of such points, but the implication is that recognition is intended to be permanent.

Barloworld’s Khula Sizwe transaction

Dentons South Africa has been acting as corporate legal adviser to Barloworld (a listed, leading global industrial company) on its recent public M&A transaction, which will form the core part of Barloworld’s strategic objective to maintain its transformative social and economic reconstruction programme in South Africa. The transaction includes the disposal and re-organisation of an extensive portfolio of core commercial and industrial properties to a property holding company, Khula Sizwe. 

Khula Sizwe has broad-based Black ownership, both through trusts established for the benefit of Barloworld employees as well as through the Black public (following an oversubscribed public offer of the Khula Sizwe shares to the Black public).

The disposal of the property portfolio to Khula Sizwe, a company established for the purpose of acquiring and leasing properties in the normal and ordinary course of business as a property holding and management company, will result in the creation of a viable separate Black-owned property company.

Khula Sizwe is anticipated in due course to expand its property portfolio and property management business beyond those properties acquired from Barloworld, with the vision of being a large Black-owned property company. The transaction has resulted in the creation of a burgeoning Black-owned property company that is anticipated to meaningfully participate in the South African property sector and create lasting value for its Black owners. 

For Barloworld, the Khula Sizwe transaction will confer upon it long-term, sustainable BEE ownership points creating an enduring empowerment legacy. This will enable Barloworld to maintain or improve its BEE status as a business imperative to operating in South Africa while focusing on its business of providing integrated rental, fleet management, product support and logistics solutions.

Conclusion

In deliberating on the empowerment imperative in South Africa, companies should consider looking beyond the traditional sale of shares structure to achieve ownership points. South African businesses can review existing assets that no longer align with their long-term business objectives and determine whether these are suitable for a Statement 102 disposal. When looking to acquire a South African business, investors should consider whether the potential subsequent disposal, following the main acquisition, of assets that may not align with their investment criteria or strategic objectives is a viable option in order to achieve their empowerment ownership points.

Footnote

1 Code Series 100: The Measurement of the Ownership Element of Broad-Based Black Economic Empowerment Statement 102: Recognition of the Sale of Assets, Equity Instruments and Other Businesses↩

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