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VIEWPOINT: Don’t give it away!

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‘I am expected to give away a part of my company!’ How often we hear these words uttered by business owners who have realised that black ownership has become a requirement for their company to be B-BBEE compliant. Many also now understand that outstanding acquisition debt on the part of a black partner may potentially penalise the company on its ownership scorecard. When under extreme pressure to submit their B-BBEE credentials to important clients, many business owners think that they have no alternative but to simply transfer shares to a black party. Sadly, this is perceived as their only option. The reality, however, is that black ownership doesn’t have to be a ‘give-away’!

The question is: How do you do a share transfer without ‘giving away some of the existing shareholders’ equity value without creating debt in the hands of your B-BBEE partner? Leading corporate advisors have solved this problem for us. There are legitimate equity models available that achieve these goals while fully satisfying the objective of the B-BBEE legislation, namely genuine black economic empowerment. The purpose of these models is to create ‘net value’ for the B-BBEE partner within a much quicker timeframe by eliminating the inherent restriction that acquisition debt imposes on the transaction. At the same time, they ‘ring-fence’ the existing equity value to the benefit of the existing shareholders who accumulated such equity value prior to the B-BBEE transaction and to whom it obviously belongs. These are self-funding models that leave all shareholders satisfied while allowing for organic flow of economic benefit to the B-BBEE partner based on the empowered company’s financial performance. In other words, a B-BBEE transaction that makes commercial sense.

I have found that there is a perception in the market that the above types of corporate restructuring models are only available to large corporates that can afford the services of expensive tax and M&A advisory firms. I mention this, as this perception is having an extremely negative impact on the overall uptake of the B-BBEE policy. It also encourages the implementation of solutions that may meet short-term compliance criteria but that will potentially have a detrimental long-term impact on the individual business as well as the economy.

Black ownership has for many become a ‘license to do business’ in South Africa. The question is, are you going to obtain your licence by accepting some ‘quick fix’ solution and thereby ‘giving away’ some of your hard-earned equity? Or are you going to implement black ownership in a manner that makes commercial sense?

Keep this in mind

It is important to remember that from a taxation perspective, transferring shares from one shareholder to another, or the company issuing shares, at a price below market value, may constitute a ‘donation’, which may trigger donations tax. It is very important that the documentation forming part of your B-BBEE transaction reflect the board’s considerations in this regard to avoid a surprise from SARS. This requires tax advice forming part of your B-BBEE transaction.

Author: Managing Director of Managing Director of NetValue™ Equity Partners