Always a pun. I am not the first to think about the concept of options or warrants. I won't tell you who did it first because theirs is too simplistic; focusing on white owned businesses and only QSEs or EMEs. I was talking to my old friend Rudolf Rautenbach who told me about Ownershield. Rudolf is a little cleverer than most in this industry. We lost Gerhardus Burger to Australia, Chris van Wyk to Mauritius and Kevin Lester to Anglo. These were three of the brightest minds in the BEE business. Rudolf has stepped up and filled the weighty shoes that Mr Burger filled by becoming THE BEE tax expert in South Africa. Part of Rudolf's experience lies in capital gains tax. This is a bugger because if you do an ownership transaction, uncle fascist SARS is going to want it's undeserved piece of the pie in the form of CGT.
This is a problem and quite possibly a major deterrent to companies having to undergo a BEE transaction. This does somewhat highlight the punitive nature of the entire BEE system. I would tell the potential partner that they must pay the CGT otherwise no deal. I digress.
Rudolf says that options are a viable vehicle for BEE ownership not only because it doesn't attract CGT. He lists a few benefits
- It's a top up method. If you have say 25% you could top it with 26% of options and you'll get your level two as an EME or QSE
- It's a good option for larger companies as well. If this programme exists in the codes then it will pass a verification
- It can be used by all companies. The structures may differ slightly but it's widely applicable
I have selected the reference to options and warrants from the Financial Sector Code (the only code that was properly negotiated and drafted) , but the words are exactly the same in the generic codes.
8 OPTIONS AND SHARE WARRANTS
8.1 Exercisable voting rights and economic interest will be recognised where a participant holds an instrument granting the holder the right to acquire an equity instrument or part thereof at a future date, if the following requirements are met:
8.2 The exercisable voting rights attached to that instrument are irrevocably transferred to the holder for the option period and are exercisable by the holder before acquiring the equity instrument.
8.3 The value of any economic interest is irrevocably transferred for the option period and paid to the holder of that instrument before the exercise of that right.
8.4 The value of an instrument must be determined by using a standard valuation method for calculating the net value.
This is where Ownershield appears to be different to other companies. Most target white -owned business that turnover less than R50m. However Ownershield looks at it from the perspective of a prospective black shareholder as well. What if the prospective shareholder (who is black but I'm not going to repeat this) agrees to take an option for 36 months. They get the benefits of ownership because of the voting rights and dividends. They may be able to store up enough money because of that dividend flow to exercise the option when it matures. And they are gaining experience of ownership. Hell there may even be executive employment opportunities. We could call this a long date – where the two parties go out with each other and then decide to marry. As opposed to an arranged marriage at the outset (which is bound to fail).
Having noted that. The option route is still good for white owned companies. There are failsafe mechanisms in the structure that will protect all parties. We can't pretend that that ownership is easy. It's not. It's a hard slog. Different cultures and different expectations get in the way. There's one example of an English speaking white South African working in a very Afrikaans environment in some dorp somewhere and he can't fit in, it's a very poor cultural fit AND THEY ARE ALL WHITE. Also if either party decides this isn't working, cancel the option agreement. Everyone walks away.
I'm not a big believer in the ethical nature of BEE nor do I believe in the spirit of it, mostly because the government's bona fides is not genuine and they have messed it all up. But for some reason I think the option erm.... option is probably the closest to the spirit of these draconian codes.
This is a solution for all businesses, even CCs. Doesn't matter how big or small you are and doesn't' involve preferential shares and a dodgy law firm in Bloem. And the turn around time is quick there's no CIPRO or the master of the high court. None of that. Yes there are a number of documents and agreements that need to be signed, there's also compliance with the Companies Act. Rudolf has got all that sorted. In fact if you don't want to manage it at all, he'll doo that for you too.
You can contact Rudolf here. Hell if I'm nice to him he might include me in the meeting.