Broad-based black economic empowerment (BEE) ownership transactions that have gone wrong are often exciting fodder for emotive news articles. But BEE ownership transactions are fundamentally the same as any other ownership transaction and shareholder selection process that would be undertaken in the ordinary course. However, a lack of understanding of the regulatory framework often creates an unwarranted fear regarding the identification and introduction of a BEE shareholder.

In this article we set out some of the general considerations taken into account when selecting a BEE shareholder and how similar the process is to selecting any external party that will become a partner and co-owner of the company.

BEE criteria

BEE criteria are the specific criteria based solely on the BEE credentials of the potential BEE shareholder and should be able to be objectively demonstrated by the potential shareholder at all times (for example, the percentage of black ownership in the potential shareholder and the composition of that ownership).

Commercial criteria

The commercial criteria are most often strategic or objective in nature and are able to be independently verified or confirmed. These criteria often include:

  • Nature of shareholder: the nature of the potential BEE shareholder, for example whether it is a strategic or charitable entity. Each type of shareholder has its separate benefits which is able to be confirmed through the entity’s BEE certificate.
  • Access to funding: the ability of the potential BEE shareholder to access funding to acquire the shares. The ability to access funding for the acquisition of shares can affect the structure of the transaction as it may need to take into account funding obligations.
  • Financial stability: the ongoing financial position of the potential BEE shareholder. This is important to understand the longevity of the shareholder and can be demonstrated through a review of its annual financial statements or personal financials.
  • Anti-bribery and corruption: whether the potential BEE shareholder has breached or conflicts with any of the anti-bribery and corruption (ABC) policies of the company or its group. Many group companies, especially multinational groups, have extensive ABC policies that can be broader than we have in South Africa and any proposed shareholder (whether BEE or not) should undergo a due diligence in this regard to ensure there is no non-compliance.

Business synergy criteria

Finally, business synergy criteria are the criteria to be considered to ensure that the potential BEE shareholder is a good business fit for both the company and existing shareholders. These criteria include:

  • Reputational risks: whether the potential BEE shareholder has any reputational risks or flags that should be taken into account. This is often called a ‘politically exposed person’ or ‘PEP’ analysis;
  • BEE understanding: the extent of the potential BEE shareholder’s understanding of BEE, ownership structures, and its sentiment towards the framework and implementation of BEE. Any BEE transaction will always be regulated in terms of BEE laws
  • Business culture: what the potential BEE shareholder’s business culture is. The key consideration we see that influences this relationship is whether there is alignment between the culture of the potential BEE shareholder with the culture of the company and the existing shareholder.
  • Business experience: the business, industry and investment experience of the potential BEE shareholders. This consideration is particularly important where a potential BEE shareholder is going to be introduced and will be expected to provide industry related opportunities or input as its contribution towards the company.

Choosing the correct person or entity as a new shareholder will always be the most important step of an ownership structure. The fact that the new shareholder will also contribute towards BEE credentials of the company does not materially impact the assessment of the shareholder – it is only one of the many factors that will be taken into consideration through the assessment process.