The B-BBEE Codes of Good Practice allow for certain types of sale of assets to contribute to your ownership points. The value of the Asset as a percentage of the measured entity determines the Ownership percentage score, allocated to the entity and this transaction is then measured over three years.
The respective black ownership percentage of the acquirer will determine the pro-rata the black ownership claimable by the seller, as a percentage of the value of the asset over remaining assets of the seller. The intention of the legislation should rather be read as “going concern”, e.g., a business unit, than an immovable asset. However, under certain circumstances, this may include the sale of a building, land, warehouse, IP, equipment, an operating division, a license or any other defined asset. The value of the Asset as a percentage of the measured entity determines the Ownership percentage score, allocated to the entity and this transaction is then measured over three years. The value of the transaction in year 3 is then applied as the Ownership score indefinitely.
What and How? The asset must be valued and compared to the value of the entire business. This is the basis for recognition. If the asset is worth 10% of the whole business, then a company could be regarded as having sold 10% of its business. The new owner’s status is used to then calculate the points.
A sale of assets transaction will result in increased participation by Black people in the economy through ownership and control of assets.
Ownership is a priority element under the B-B BEE Codes. When a minimum threshold of Net Value is not achieved, a measured entity will be penalised by dropping a level on its B-B BEE status. The most important aspect of the Ownership scorecard is measurement and scoring of Net Value, i.e., wealth creation for Black persons.
A Sale of Asset transaction must meet specific requirements:
The transaction must result in the creation of viable and sustainable businesses or business opportunities in the hands of Black people.
The transaction must result in the transfer of critical and specialised skills, managerial skills, and productive capacity to Black people.
The transaction must involve a separately identifiable related business which has no unreasonable limitations or conditions with regards to its clients or customers, and clients, customers or suppliers other than the seller.
BEE shareholders or their successors (if the BEE shareholding is the same or improved) must hold the asset for a minimum of three years.
Any operational outsourcing arrangements between the seller and the purchaser must be negotiated at arms-length on a fair and reasonable basis.
The transaction should be subject to a valuation by an independent expert.
A repurchase transaction cannot be entered into within a three period after transaction implementation, even if transaction implementation is deferred post year three.
Ownership points are subject to existing contracts between the parties to remain in effect on market related terms, subject to marked norm service levels.
Note: The codes say, “transfer of business rights by way of license, lease or other similar legal arrangements not conferring unrestricted ownership; and sales of franchises by franchisors to franchisees but includes sales of franchises from franchisees to other franchisees or to new franchisees do not qualify for recognition”.
Traditional Net Value assessment (in a share ownership transaction) involves application of a series of formulae that input value of the measured entity, the value of related shares held by Black investors, as well as their outstanding acquisition debt, in order to assess related net asset value of the Black investor as a proportion of the value of the measured entity.
Application in Private Equity.
Where a going concern is sold to a Private Equity fund managed by a black fund manager, and such a fund complies fully with other aspects of Section 3.10 of the B-B BEE codes of good practice, the sale may also contribute to ownership points in the hands of the seller. We have recently seen a highly synergistic applications of such a methodology, and should you still be stumped as to your best ownership solution in your company please reply to this mail and I will happily set up a free consultation.
In these same examples, we have also seen that it pays to follow a professional approach in the design of a South African ownership structure beyond compliance to B-B BEE. For example, given relaxation of looping structure regulation, there are possible offshore tax advantages to your company as well as reducing both your dividend and company taxes where place of effective management can be achieved abroad.
Compliance Hub has partnered up with Ingenious Capital as our service provider who creates well thought-through and responsible sale of asset structures for companies with or without offshore structures that may offer tax advantages to entities. Ingenious Capital is a niche strategy, implementation and ongoing execution partner for a variety of corporates, funds, projects and legal structures.
Please contact me and I gladly assist you with a structure
Article By:
Hilton Johnson: CEO - Compliance Hub