FSC Continuing Consequences (or once empowered etc)

(Before I start, I have prepared a comprehensive presentation on the draft FSC that I am more than happy to present to any concerned person).

The issue of once empowered, always empowered was always going to be a deal breaker under the FSC. The appetite to go off and re-negotiate another deal after billions in costs for the first one just wasn't there. The compromise is contained in paragraph 3.5 of the ownership statement in the new draft. As with the balance of the FSC, it actively incorporates the DTI's generic codes (not merely referring to them) and in many cases improves on the original codes. The basic rules contained in the DTI's continuing consequences still remain, viz (as per paragraph 3.5 of the DTI's generic codes);

• the black participant has held shares for a period of 3 years;
• value must have been created in the hands of black people;
• transformation has taken place within the measured enterprise.
• black participation arising from continued recognition of black ownership cannot contribute more than 40% of the score on the ownership scorecard.
• a written tripartite agreement between the Measured Enterprise, the black Participant and a lender must record the loan or security arrangement, unless the Measured Entity is the lender; and
• the period over which the points were allocated or recognised will not exceed the period over which the shares were held.

The FSC takes these principles and provides formulas and concrete explanations in each of these cases. But it makes it very clear that it is only those shares that were sold/loss after 1 January, 2011. What I'm not sure about is when this kicks in. For example say the black shareholder sells out on the 2^nd of January, 2011 and they'd been a shareholder for five years. This principle will only be promulgated sometime this year (2012). Do the continuing consequences start on the day of promulgation or do they start on the 2^nd of Jan, 2011 – which means that one and half years will have passed and the company may only recognise that ownership level until the 2^nd of Jan, 2016.

The machinations of the principle are contained in paragraph 5 of Annex 100 (C) which I have reproduced in its entirety below.

Some may scoff at this and say, yes but you only get 40% of the points. But that isn't the point, the point is that the big companies that fall under the FSC are all pretty much in the same boat when it comes deals and vesting. If each gets a 60% reduction in their ownership score then they'll still be much of a muchness. There'll be a slight discrepancy between some of those companies whose deals vest after others. But eventually there will be no ownership points and those companies will be measured out of a maximum of 91 points, which is still a level 2. See the FSC scorecard below

FSC ownership scorecard

FSC elements and points (taken from FSC Draft phase 1)

Annex 100 (C) paragraph 5

 

Calculation of the Recognition of Ownership after the Sale of Shares by Black Participants:

 

The calculations referred to in Paragraphs 3.5.1.2 of FSCode 100, Statement 100, use the following formula:

 

For Paragraphs 2.1 and 2.3 of the Ownership Scorecard

 

A=B x C x D

Where

A is the percentage of rights of ownership that survive the sale of an Equity Instrument by a black Participant in Paragraph 3.5.1.2 to 3.5.4.3

B is the percentage of rights of ownership for each of the indicators in the ownership scorecard that were attributable to the black Participant immediately before his or her sale

C The net value realized/created in black hands after the liquidation of debt as a % of the value of the Sale Shares of each of the indicators immediately prior to exit

The net value created in black hands is equal to the current value of the shares less any own contribution made by the BEE party at the inception date of the transaction

D is the most recently determined BEE Recognition Level of the Measured Entity (which must be less than 1 year old) based on its Generic Scorecard result for all Elements other than ownership determined using statement 000

For Paragraphs 2.2, 2.4 and 2.5, A shall be equal to the percentage held by black Women/Designated Groups immediately before their sale of shares multiplied by the result of the calculation under this Paragraph 5.1.

 

For Paragraph 2.6 of the Ownership Scorecard

 

In relation to calculating the percentage of ownership rights that survive after the sale of shares specifically for Paragraph 2.6 of the Ownership Scorecard the following calculation shall apply:

A= B X C X D

Where A is the percentage of rights of ownership that survive the sale of an Equity Instrument by a black Participant in Paragraphs 3.5.1.2 to 3.5.4.3

B is the percentage of the Equity Instruments diluted, determined on the date of measurement immediately before his or her sale

C value of the equity interests sold (less) the value of any own contribution made at the inception date of the deal in relation to the shares sold (less) the carrying value of any acquisition debts of the relevant black Participants on the date of sale or loss divided by the value of the measured entity at the date of sale or loss

D the recognition level of the measured entity excluding ownership immediately prior to the loss or sale

Illustrative example

Assume that BEE consortium holds 10% of a measured entity at 01/01/2009 (the commencement date). 50% of this holding is attributable to black women and 50% is attributable to Black Designated Groups

As at the commencement date the value of this holding is R150 (enterprise value R1500) and the value of the associated debt is R100.

BEE Consortium provided R10 own cash contribution and R90 was debt funded in lieu of the purchase price of R100 for 10%

Through corporate action this holding is diluted fully at 31/12/2012

At 31/12/2012, the value of this holding has grown to R180 and the debt is R80. The value of the business is therefore R 1800.

The measured entity is a level 3 contributor excluding ownership as at 31/12/2012.

Calculation for Paragraphs 2.1 and 2.3 of the Ownership Scorecard:

A=B x C x D

B = 10%

C = ((180-80-10)/180) = 50%:

R180 is the value of the shares sold, R80 is the debt outstanding and R10 is the value of the consortium's own contribution at the inception of the transaction.

D = 110%

The continued recognition under Paragraphs 2.1 and 2.3 of the scorecard will therefore be:

10% * 50% * 110% = 5.5%.

The continued recognition under Paragraphs 2.2, 2.4 and 2.5 of the scorecard will therefore be:

50% x 5.5% = 2.75%

Calculation for Paragraph 2.6 of the Ownership Scorecard:

A=B x C x D

B = 10%

C= (180 -80 - 10) /1800 = 5%

D= 110%

The continued recognition under Paragraph 2.6 is therefore 10% * 5% * 110% = 0.55%.