Sanchia Temkin
6 November 2008
Johannesburg — CONTRADICTIONS between the black economic empowerment (BEE) codes and the government's interpretive guide to the codes are a huge impediment to businesses and have hamstrung a number of business equity deals.
Michael Denenga, a partner at commercial law firm Webber Wentzel, this week said many private equity funds had held back on possible empowerment deals and had delayed the structuring of new funds until there was legislative authority on the matter.
"Clarity is needed as a matter of urgency," Denenga said. "The uncertainty around the BEE codes is ironically hurting the people they are designed to empower." Denenga said the interpretive guide's provisions on private equity directly contradicted those of the BEE codes.
It seems the trade and industry department's interpretive guide tried to curtail the harsh effect of the codes' wording by construing the measured entity to be the fund manager as opposed to the private equity fund, Denenga said. "This would make sense if the intention of BEE is to advance the interests of black people and not to direct them as to where they should invest their funds, as would be the case if reference is to the private equity fund.
"This would mean that an inquiry into the BEE status of the investors would add weight to whether or not the private equity fund is empowered. "
At first sight it appeared as though the guide would assist in private equity empowerment because the measured entity was deemed to be the private equity fund manager and not the private equity fund, he said. However, the interpretive guide had no legal standing on its own, as South African law did not make provision for post-legislative interpretative guides.
Some rating agencies had performed verifications for a private equity fund under the interpretive guide but could not issue certificates based on their findings because this could be challenged as not being authoritative. "It is possible for a ratings agency to issue a qualified letter, certifying the ratings but providing that such rating was granted in terms of the interpretive guide as opposed to the BEE codes," Denenga said.
Where such a qualified letter was issued, it was arguable the underlying investment would not be able to claim that the shares held by the fund were empowerment related as the assessment was done based on a guideline that effectively contradicted the BEE codes, he said.
Denenga warned, however, that there were verification agencies that were willing to issue a certificate instead of a qualifying letter based on the interpretive guide.
"Funds that receive such certificates, however, run the risk that the rating may be challenged as a misrepresentation of the BEE status of the fund," he said.
Since advisory firms and verification agencies had such an important role to play in implementing and monitoring BEE, it had become critical that all industry bodies and players were accountable for continuing transformation in their industry.
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