The B-BBEE Commission announced in January 2018 that it made findings against a verification agency, SAB&T BEE Services (Pty) Ltd. It recommended remedial steps including the issuing of a public apology and the commissioning of an independent audit of all certificates issued by the agency for 2014 to 2016. The B-BBEE commission is an entity of the Department of Trade and Industry (dti). The commission aims to address fronting and introduces mechanisms to prevent it from happening.
However, Chris Rayner, Associate at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions with specialist expertise in B-BBEE ownership transactions, points out that there remains uncertainty in understanding and managing the regulatory landscape under the B-BBEE Act. The second half of 2017 saw a number of material developments in South Africa’s BEE landscape, driven by an increasingly active regulator committed to investigating potential non-compliance and instances of fronting.
The most notable development occurred in August 2017, when the Commission released a public statement confirming that seventeen investigations were being undertaken into instances of non-compliance with the B-BBEE Act and potential fronting practices in relation to existing transactions.
The public nature of the announcement and high-profile companies included therein created enormous uncertainly in the market as to how market participants were to manage and handle such matters.
This was followed in October 2017 by the announcement of Sasol’s Khanyisa BEE scheme to shareholders, with the supporting circular noting significant differences in opinion with the Commissioner regarding the treatment of the Khanyisa Employee Share Option (“ESOP”) scheme.
The B-BBEE Commission had raised concerns about Sasol’s entitlement to claim ownership points in respect of the proposed holding of shares by the Sasol Khanyisa ESOP trust based on the B-BBEE Commission’s interpretation of what constitutes ownership. As such, the Commission said that it would not recognise the holding of Sasol Shares by the Sasol Inzalo Foundation as eligible for ownership points. Sasol begged to differ with the Commission’s interpretation of what constitutes ownership, pointing out that the structure of the Sasol Khanyisa ESOP was materially no different to structures adopted by other South African corporates in their BEE ESOP schemes. Currently, the Commission is considering arguments put forward by Sasol, and the company has shown willingness to continue engagement with the Commission in this regard.
This was the most high-profile instance of a corporate publicly disagreeing with the Commission to-date.
These developments have served to foreground investor uncertainty regarding obligations under the Act and the rights of the Commission following the implementation of a particular transaction. Some key points to consider in navigating this uncertainty are discussed further below.
The Act’s reporting obligations are post-closing requirements
The most important distinction between the more widely-understood regulatory processes of the Competition Commission and the Takeover Regulation Panel, and those set out in the B-BBEE Act is that the B-BBEE Act provides for a registration requirement rather than a transaction approval requirement.
In other words, registration of B-BBEE transactions (where required) is performed only once the transaction is completed, all condition precedent are fulfilled and the deal has become effective. The registration of the transaction with the B-BBEE Commission must take place within 15 days after the closing date. There is no pre-closing approval of transactions by the B-BBEE Commission. However, it is possible (and strongly encouraged under the B-BBEE Regulations) to approach the Commission for a non-binding advisory ruling. However, this remains non-binding and does therefore not provide absolute certainty.
The “90-day Review Rule”
The primary source of concern for corporates is that, although there is no pre-closing approval mechanism in the Act, a post-closing mechanism enables the Commissioner to take action on transactions.
The so-called “90-day Review Rule” provides the Commissioner with a 90-day window period in which to advise the party which undertook the registration of ‘concerns about the transaction’ as regards compliance with the Act. Thereafter, Regulation 18(4) of the Act goes on to place an obligation on that party to ‘take steps to remedy the transaction’ within a reasonable period following such notice from the Commission.
This is highly problematic from a commercial perspective, as the Commissioner has in effect a post-closing right to obligate the parties to restructure, amend or even unwind the transaction. Despite this, such right may be considered to have limited practical application given that there are no direct consequences where such remedies are not implemented by the registering party. The Commission is then left with its rights to appeal to a court process to seek such remedies.
Notably, Regulation 18(3) places no obligation on the Commissioner to approve or otherwise communicate with the registering party (other than providing notice of the registration itself), thus the practical scenario could be interpreted as “no news is good news.”
However, the Commission is entitled to its rights under section 13F(1)(d) of the Act, which empowers the Commission to investigate transactions on its own initiative and to apply the provisions of section 13J(4) to “institute proceedings in a court to restrain any breach of this Act, including any fronting practice, or to obtain appropriate remedial relief.”
The Commissioner therefore has a perpetual right of investigation but must work through the court system to seek remedy. This is different to the 90-day period, in which the Commissioner does not need to follow a court process.
Validity of issued B-BBEE Certificates
At the heart of the matter is clearly the actual B-BBEE position of the measured entity at hand. The document of record is the B-BBEE Certificate itself and, when issued by the respective verification agent, establishes the basis on which the entity is able to present is relevant B-BBEE compliance status.
As noted above, the registration process and the powers of the Commission do not imply a tacit approval of the transaction. Whilst the Commission retains its rights ad infinitum to apply to court to seek remedies at any time, the B-BBEE Commission does not have the right to summarily cancel the B-BBEE Certificate itself. This is an important concept as, until such time as the Commission has completed the relevant court process, it would seem that the B-BBEE Certificate remains valid.
Managing transaction risk
Many transaction structures require a specific B-BBEE level to be achieved as a condition of the deal. Although a ratings agent may provide such a certificate before registration of the transaction with the Commissioner, the 90-day rule can result in potentially significant post-closing challenges.
In complex transactions such as those where external funding parties have approved credit lines based on the entity achieving a certain B-BBEE level, it would be advisable to work with well-established B-BBEE ratings agencies, and legal and corporate finance advisors who are experienced in B-BBEE transactions and who can highlight potential issues at an early stage. In addition, a non-binding advisory ruling from the B-BBEE Commission could assist with the process.
The bottom line is that fronting is a criminal offence and one which the Commission, as underscored by its recent actions, is committed to rooting out. When undertaking transactions, corporates are advised to take cognisance of the 90-day rule. Besides ensuring that the transaction has been impeccably structured, additional scenarios should be planned and professional advice sought, in order to navigate the transaction-closing challenges that exist under the new regulatory environment.
Watch here: Interview with Chris Rayner on eNCA Moneyline
Published in: Business Report 08 February 2018