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South Africa: Financing of BEE Deals Granted Strict New Exception
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Business Day (Johannesburg)
5 May 2008
Posted to the web 5 May 2008
Sanchia Temkin
Johannesburg
MORE responsibility will be placed on the boards of those companies that provide financial assistance to buy shares in their own organisations to facilitate black economic empowerment (BEE) deals, say corporate law advisers.
Companies must comply with new stringent qualifications when providing financial assistance, failing which the transaction may be declared void and there may be criminal prosecution.
Wildu du Plessis, head of banking and finance at Werksmans, said at the weekend that the recent amendment to section 38 of the Companies Act still prohibited the providing of financial assistance for the buying of a company's own shares or those of its holding company, but with a new exception which is subject to stringent tests.
The recent amendment had caused widespread misunderstanding, Du Plessis said.
The amendment does encourage corporate activity in SA, by permitting companies to provide financial assistance to buy shares in themselves or their holding companies subject to certain exceptions.
These stringent qualifications place more responsibility on boards, as they will ultimately assess the majority of these tests.
"In the past companies couldn't give any financial assistance to investors that wanted to buy shares in the company," Du Plessis said.
This was particularly troublesome in empowerment transactions, where empowerment parties typically had no capital, and little access to finance, but could contribute meaningfully to the future growth of the company, he said.
"The amendment introduces a new exception to the prohibition on financial assistance, but lists three requisites, and the assistance must comply squarely with all three or it falls foul of the legislation with all that entails -- namely, the contract will be voided and there may be criminal prosecution," Du Plessis said.
"However, if the three tests are met, a company can provide such financial assistance directly, or provide guarantees or other security to a financial backer of such a deal. This further opens the door to a greater BEE deal flow, but also to other types of transactions such as private equity."
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The three tests are: the board must be satisfied that subsequent to the transaction the assets of the company will exceed its liabilities; that for the duration of the assistance, the company remains liquid; and that shareholders of the company must have approved the terms of the transaction by special resolution.
This thing has passed its sell buy date>
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