As a general rule, government agencies cannot influence or restrict the completion of business combinations or acquisitions, other than through relevant competition regulations, or in specific regulated industries (such as mining, banking, insurance, telecommunications and broadcasting). In relation to competition approval, the Minister of Economic Development may intervene on matters of public interest (for example, employment, the inclusion of small and medium-sized enterprises and entities owned by historically disadvantaged persons). In addition, the recent amendments to the Competition Act introduce national security provisions that provide for intervention by an executive body to be established by the President, referred to as the ‘Committee’, in mergers involving a ‘foreign acquiring firm’. A transaction constituting a notifiable transaction in terms of the Competition Act, that involves a foreign acquiring firm, and that falls within a list of national security interests must be notified to the Committee at the same time that the transaction is notified to the Commission. The Committee is required to decide whether the transaction may have an adverse effect on the national security interests of the country. There are, as at the date of writing, no further indications as to the composition of the Committee, the list of national security interests or the form or process to be followed for the submission of a notice in terms of this provision.
South Africa also has strict exchange control regulations in place, and a South African resident may not transfer capital or any right to capital out of South Africa except in accordance with those regulations. South African residents cannot enter into certain transactions that involve the transfer of capital without the approval of the Financial Surveillance Department of the South African Reserve Bank or, in some cases, an ‘authorised dealer’ (authorised dealers are typically the large commercial banks in South Africa that have delegated authority in relation to certain exchange control matters).
In addition, the South African government has put in place a regulatory framework for broad-based black economic empowerment (B-BBEE), which is a central part of its economic transformation strategy. A multifaceted approach to B-BBEE has been adopted with a number of components that aim to increase the number of black people (being South African citizens who have been racially classified as African, Indian or Coloured) that manage, own and control the country’s economy, and to decrease racially based income inequalities.
The Broad-Based Black Economic Empowerment Act, 2003 (BEE Act) is the principal legislation through which B-BBEE is measured. The Minister of Trade and Industry published the revised Codes of Good Practice (general Codes) under the BEE Act, which set out the details of the measurement process, in October 2013. The Minister of Trade and Industry has also published various sector-specific codes that detail the manner in which B-BBEE must be measured for businesses operating in particular sectors. Where a sector-specific code has been issued, businesses in that sector are required to apply the relevant sector code rather than the general Codes. The general Codes apply only where there is no sector-specific code although the general Codes and the sector-specific codes should generally apply the same broad principles. Sector-specific codes are currently in place for the tourism, forestry, information communication and technology, marketing, advertising and communications, finance, construction, property, agriculture and defence sectors. The sector code for the transport sector is still in the process of being aligned with the general Codes, although a draft sector code for this sector has been published for public comment.
Other than in certain state licensing, permitting and authorisation processes, there is no ‘hard law’ requiring that any private entity in South Africa must meet specific B-BBEE targets or must implement a B-BBEE policy. Neither the BEE Act nor the codes impose any requirement that a certain level of B-BBEE must be achieved or that a certain percentage of equity in a business must be held by black people, and there are no sanctions for non-compliance. However, in certain sectors, such as mining and telecommunications, minimum equity requirements are or may be imposed in terms of the sector-specific legislation governing those sectors.
From a practical perspective, although there are no absolute requirements in relation to B-BBEE, any company wishing to do business in the South African environment must consider and develop its B-BBEE position as, in addition to the pressures from government discussed below, an entity that does not have a good B-BBEE rating, or does not strive to improve its B-BBEE rating, may be hampered in the conduct of its day-to-day business with government, organs of state and private sector customers. Most private sector businesses to which services are rendered or goods are sold will themselves have B-BBEE procurement targets to meet and so the B-BBEE rating of entities from which goods and services are procured will be a factor in determining with whom to do business.
In terms of the BEE Act, government bodies and state-owned enterprises are required to take private sector parties’ relative B-BBEE levels into account when they procure any goods or services, when they issue any licence or other authorisation, or enter into partnerships with the private sector. The Preferential Procurement Policy Framework Act, 2000 also provides that B-BBEE must be considered by any public sector body in the context of its procurement practices and details the manner in which B-BBEE must be taken into account by government departments and agencies and state-owned entities.
A private sector company could also have its own B-BBEE requirements that go beyond that provided for in the Codes. Where customers impose such requirements, a prospective supplier’s B-BBEE measurement is a competitive assessment of its B-BBEE status relative to that of its competitors.
In assessing B-BBEE, a ‘scorecard’ approach is used whereby the different aspects of B-BBEE are accorded points. A general scorecard is included in the general Codes. Sector-specific scorecards are included in the sector codes that are applicable to particular sectors. The scorecards detail the various elements and sub-elements of B-BBEE on which enterprises are measured and stipulate targets to be achieved for each element and sub-element.
The closer an enterprise is to reaching a particular target, the more points it will achieve for that element of B-BBEE. The more points a business achieves in total across each of the individual elements, the higher its B-BBEE status level will be. Under the general Codes, Level 1 is the highest status level. Sub-minimum requirements also apply in the context of the ownership, skills development and enterprise and supplier development elements. If the sub-minimum requirements (ie, 40 per cent of the relevant targets) are not met, a measured enterprise will be deemed to drop one B-BBEE level.
Where a business presents any information in relation to its B-BBEE score, this must be supported by a certificate issued by an accredited verification agency. These certificates are valid for a period of 12 months. The general Codes provide that, when measuring B-BBEE levels, substance applies over legal form. This is an attempt to limit instances of ‘fronting’ by enterprises that make representations that they have adopted particular B-BBEE initiatives in order to score points when, in substance, the initiatives have not been adopted. In terms of the BEE Act, it is a criminal offence to engage in fronting or to make deliberate misrepresentations in relation to an enterprise’s true B-BBEE status. The BEE Act also establishes a B-BBEE Commission, which is responsible for investigating alleged ‘fronting’ practices and referring them for prosecution. Fines for fronting may be up to 10 per cent of a company’s annual turnover.
In terms of the BEE Act, listed companies are required to report annually on their levels of B-BBEE. Major B-BBEE ownership transactions that are aimed at increasing a measured entity’s score for ownership where the transaction value is 25 million rand or more have to be reported to the B-BBEE Commission.
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