This post was originally published in April 2013. Please excuse the indulgence of the repost. What is interesting is that certain links in the original post are now dead. I've had to look for new ones.
The BEE world is really for the good times. Empowerment likes the idea that companies make money and black shareholders get rich. It doesn't do the bad times very well, for instance if a black shareholder is unable to meet the payments for the shares then the company is penalised under the ownership scorecard. What happens if you have a black shareholder who actively does not wish to exercise his shareholder rights. In other words, what do you do with a delinquent shareholder.
Ownership is measured by both voting rights and economic interest. Lesley Fodor has in a comprehensive article on voting rights and shareholders' meetings, writes (on the issue of voting rights) - the original link has broken, sorry Lesley.
The primary rights of shareholders relate to their entitlement to vote at meetings of the shareholders. While this does not confer a direct role in management of the company (this function falling within the purview of the directors), the directors are required to implement those decisions of the shareholders, which are reserved to them.
It follows then that voting rights must be EXERCISABLE. If restrictions are found it's likely that the voting rights' points won't be awarded. If you are interested in a summary of shareholder rights have a look at this post.
That's voting rights sorted. Economic interest is simply (to quote Kyle and Vuyo, page 192) "the basic monetary right of ownership. It refers to an ENTITLEMENT of black people to dividends, capital gains and other economic rights of shareholders." The operative word is ENTITLEMENT. The word does not mean that the person needs to receive cash directly through dividends, there may be an agreement that dividends will be used to settle a debt first and only then will the shareholder get that cash. Any restriction on this entitlement would be considered in determining whether the economic interest points will be allocated. An unreasonable restriction will in all probability not make it through a verification (I really do give verification agencies a lot of credit when it comes to understanding company law).
Say now you have shareholder that is entitled to vote at a shareholders' meeting but chooses not to. I am aware of a specific case where a shareholder has a majority stake in a company and doesn't seem to get on with the other shareholders and as such doesn't vote or pitch to shareholders' meetings. There's no legal reason why he can't; it just seems that he doesn't want to. This example has an interesting issue when it comes to dividends. Dividends can only be declared when a profit is made, the company in question has yet to make a profit and as such hasn't declared a dividend. The shareholders' agreement has this to say on distribution of dividends.
The shareholders shall procure that the Company shall….. declare and pay dividends equal to a percentage, to be determined and recommended by the board of directors, of the distributable profits of the Company.
This was a problematic paragraph for me but I spoke to two lawyers who both confirmed that the directors cannot distribute dividends on a whim contrary to the percentage shareholding of each shareholder. In other words if you own 25% then you will get 25%.
In this case we have a shareholder who doesn't want to vote and who has never received a dividend because the company hasn't made any money yet. This same shareholder would be described as black and therefore is very beneficial to the company's BEE credentials. That's where the simplicity stops. The company's BEE scorecard considers four other elements and ignores the ownership element – even though the company is in fact (and in law) 51% black owned. It would seem that the verification agency refused to consider this element because they could not interview the shareholder – a requirement that comes from the Udge-approved verification manual; viz paragraph 7.1.6 which states that a verification agency must
Interview a sample of the black shareholders to determine whether they understand their voting rights and whether they have exercised such voting rights independently
This cannot be regarded as fair on the company. There are no restrictions on the ownership in any shape or form, it is only the personality of the shareholder that gets in the way of the allocation of ownership points. Unfortunately there is nothing in any of the BEE information including Vuyo's Book (he does like Black with an uppercase B) that anticipates this situation even though I would suggest it is very common.
We need a solution; what I recommend is that the company follows the procedural guidelines listed by BDO and Fodor and if the shareholder chooses not to attend then that shareholder has not been denied their rights. This is the same argument that I have put forward for this case.
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