BEE stands for Black Economic Empowerment, a South African initiative promoting economic participation for Black South Africans.
BEE ownership refers to Black people or entities owning shares in a company.
Ownership is a priority element which means companies that have an annual Turnover of more than R50 mill per annum must have at least 10% black ownership to prevent a one level rating drop.
Companies with an annual turnover of less that R 50 mill and have 51% black ownership are exempt from B-BBEE Certification and earn an automatic level 2 (COGP Sector)
Put Clause:
A put clause grants the owner (the "putter") the right to sell their shares back to the issuing company (the "issuer") at a predetermined price and under specific circumstances.
In a B-BBEE transaction, a put clause can be included in the agreement between the company issuing shares (the issuer) and the Black investor or entity acquiring those shares (the putter). This clause gives the putter the right, but not the obligation, to sell their shares back to the issuer under specific circumstances and at a predetermined price.
Here's a breakdown of how it works in a BEE context:
Putter: This would be the Black investor or entity acquiring ownership in the company as part of the BEE transaction.
Issuer: This is the company issuing shares to fulfil its BEE ownership requirements.
Predetermined Price: This is the price at which the putter can sell their shares back to the company. It's typically negotiated and fixed in the agreement upfront. The price could be a fixed amount, a percentage of the original purchase price, or tied to the company's share price at the time the put option is exercised.
Specific Circumstances: These are the defined situations that allow the putter to trigger the put option and sell their shares back. Here are some potential scenarios:
Financial Performance: The put option might be triggered if the company's financial performance falls below a certain level for a specific period. This protects the Black investor from significant losses if the company struggles.
Change in Control: The put option could be exercised if there's a major change in the company's ownership or control, potentially impacting the BEE investor's position.
Deadlock or Dispute: If there's a deadlock or unresolved dispute between the BEE shareholder and the company, the put option might offer an exit strategy.
Benefits and Considerations:
While a put clause can offer security for the Black investor, there are also considerations for the company:
Benefits for Black Investors: Provides an exit strategy and protects them from significant losses if the company underperforms.
Considerations for the Company: Can be financially burdensome if the company needs to repurchase shares.
Alternatives to Consider:
Staged Ownership: The BEE ownership stake could be gradually transferred over time, reducing risk for both parties.
Performance-Based Incentives: Incentives linked to the company's performance can reward Black shareholders when the company does well.
Combining BEE Ownership with a Put Clause:
Increased Pool of Potential Investors: The put clause can make BEE ownership more attractive to a wider range of Black investors. Investors who might be hesitant due to market fluctuations or concerns about the company's future trajectory might be more willing to participate knowing they have a guaranteed exit option. This could broaden the pool of potential investors and potentially bring in fresh capital for the company.
Improved Shareholder Relations: A put clause can foster a sense of trust and security with BEE shareholders. It demonstrates the company's commitment to fair treatment and potentially strengthens the company's relationship with its Black stakeholders. This can lead to better long-term collaboration and a more positive public image for the company regarding its BEE.
Signaling Confidence (with specific conditions): While a put clause can sometimes be interpreted as a lack of confidence, it can also be framed strategically. If the put option is only triggered under specific circumstances, like a significant decline in share price or a major change in company direction, it can be seen as a reasonable safeguard for both parties. This way, the company can still signal its confidence in its overall performance.
Negotiation Leverage: The inclusion of a put clause can be used as a negotiation tool. The company can offer a put option with specific terms (price, timing, conditions) in exchange for concessions from the BEE investors on other aspects of the deal. This can help the company achieve a more favourable overall agreement.
Staged Ownership: The BEE ownership could be phased in over time, allowing for a gradual transfer of shares and potentially reducing risk for both parties.
Performance-Based Incentives: Instead of a put clause, you could offer incentives tied to the company's performance, rewarding BEE shareholders when the company does well.
Ultimately, the decision of whether to offer a put clause requires careful analysis and professional guidance.
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