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      Home BUSINESS Doing Business in SA BEE

      BEE – Watch Your Language

      Juliet Pitman by Juliet Pitman
      Oct 26, 2009
      in BEE
      11
      Waste Basket with Papers
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      It’s Do Or Die In BEE Compliance

      Many businesses just don’t have access to regular legal advice because the costs are prohibitive. It is therefore left up to business owners to make sense of legislation pertaining to them.

      However, complex wording makes it impossible for a layperson to foresee all the potential ramifications of legal acts. One key example is the Competition Commission’s wording regarding mergers, particularly relevant in the current climate of small business mergers with BEE companies.

      In theory, the Competition Commission is actually a good thing, allowing small and medium-sized businesses an equal opportunity to participate in the economy. Its mandate is as follows:

      • To promote the efficiency, adaptability and development of the economy
      • To provide consumers with competitive prices and product choices
      • To promote employment and advance the social and economic welfare of South Africa
      • To expand opportunities for South African participation in world markets and recognise the role of foreign competition
      • To ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy
      • To promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged people

      It also “regulates restrictive practices, mergers and the abuse of dominance”. So an organisation with 45% or more market share is required to conduct its business according to strict rules. This is to prevent dominant players from exerting market power to the exclusion of smaller competitors. If smaller competitors were pushed out of the market, the dominant company could drive prices up. Because the Competition Commission is concerned with the welfare of the consumer, it aims to ensure that markets remain competitive.

      However, when it comes to mergers, businesses are going to have to pay close attention to the wording of the Competition Act and to what is known as “minority protection wordings” in their merger agreements with BEE companies. This is because the Competition Commission needs to be notified of certain mergers, which can be a costly process. Many companies incorrectly believe that their mergers do not fall into this group. The key lies in how the minority protection rights are worded in the merger contract.

      To determine whether you need to notify the Competition Commission of a transaction, you must know if the transaction constitutes a merger. The Act states that a merger “occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm.”

      The Competition Commission must also be notified of all mergers and acquisitions that meet a certain financial threshold: “if the combined annual turnover or combined assets of the acquiring firm is more than R200 million, and the target firm is more than R30 million.”

      For smaller companies that do not meet the financial threshold, the first provision is the most relevant. The key word is “control” – does the merger allow for one firm to acquire direct or indirect control over the other? As most BEE deals give the BEE company a 25%to 26% equity stake, and people assume that “control” means they must have an equity stake of 51% or more, the majority of business owners believe that their mergers are not notifiable.

      Kevin Homann, a founder-director of Spirit Capital, a corporate and structured finance company, explains: “Entrepreneurs with little experience of competition law assume that 51% equals control. But many precedents indicate that commissioners will apply a less simplistic definition. Much smaller stakes have attracted their attention.”

      He goes on to add, “The key is the strategic influence exercised by the equity stakeholders, including a new BEE partner with ownership of perhaps a quarter of the business.”

      What’s important here is how the Competition Act defines control. A person controls a firm if that person:-

      1. beneficially owns more than one half of the issued share capital of the firm
      2. is entitled to vote a majority of the votes that may be cast at a general meeting of the firm, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that person
      3. is able to appoint or to veto the appointment of a majority of the directors of the firm
      4. is a holding company, and the firm is a subsidiary of that company as contemplated in section 1(3)(a) of the Companies Act, 1973
      5. in the case of a firm that is a trust, has the ability to control the majority of the votes of trustees, to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust
      6. in the case of a close corporation, owns the majority of members’ interest or controls directly or has the right to control the majority of members’ votes in the close corporation
      7. has the ability to materially influence the policy of the firm in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in paragraphs (a) to (f).

      This last point is most relevant. To avoid allegations of tokenism and fronting, many BEE shareholders seek what is known as “minority protections” that give them a say in how the business is run, even though they don’t have a “controlling” 51% shareholding. Although there is not yet a set-in-stone interpretation of what the Commission means by the words “materially influence”, Spirit Capital has received legal opinion that “it is generally accepted that such powers and/or rights like having (a final) say on issues like budget, business plan, investments, appointment of senior management, direction of the commercial policy of a business and casting votes in the event of a tie in voting in members or board meetings would denote the existence of control“.

      If the minority protection wordings in a contract can be interpreted as effective control, then the merger could be notifiable to the Competition Commission because it meets the criteria set out in point (g).

      So what does this mean for your business? The answer is increased costs. As Homann warns, “The wording of these provisions could add up to R1 million to the cost of the deal.” The Competition Commission charges a hefty fee for notification of a merger. Where the combined annual turnover or assets are at or above R200 million, but below R3,5 million and the target firm’s assets are at or above R30 million but less than R100 million, a R75 000 fee is charged. If the combined annual turnover or assets are at or above R3,5 billion and the target firm’s are at or above R100 million, the fee is R250 000.

      Your business will also need to carry the cost of preparing and submitting supporting documentation for the merger. There’s also the time factor to consider. The approval process can take anything from 20 days to several months. The upshot is that you could become embroiled in a lengthy and costly operation far beyond what you ever imagined. To avoid the notification requirements, the transaction documentation for your merger, and in particular the minority protection wording, needs to be carefully planned and drafted, so you would do well to invest in the services of a competition law expert.

      Juliet Pitman

      Juliet Pitman

      Juliet Pitman was a features writer at Entrepreneur Magazine.

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